Commercial real estate a bright spot

Industry experts say sector should weather recession

November 2, 2001 - San Diego, CA - During the last recession a decade ago, the commercial real estate market took such a beating that Matt Reno, president of San Diego builder Reno Construction, lived by the mantra "try to survive until '95."

Today, many economists think the nation is in recession again. So Reno and the rest of San Diego's commercial real estate industry have begun calculating how bad the damage will be this time around.

Despite warning signs of weakness in tech-heavy suburban markets, industry experts say the local commercial real estate market should escape a meltdown like the one that occurred in the early '90s.

In fact, commercial real estate in San Diego and the rest of Southern California is expected to be one of the few bright spots in the U.S. real estate market.

That was the consensus forecast from Commercial Real Estate Trends 2002, a conference held yesterday at the University of San Diego and presented by Burnham Real Estate Services.

"The San Diego commercial real estate markets are more stable than most major markets in the U.S.," said Mike Philbin, managing director of transaction services for Burnham.

Because overbuilding locally isn't nearly as bad as it was in the early '90s -- and because the region's powerhouse technology companies are concentrated in biotech and telecommunications rather than in Internet dot-coms -- San Diego has been somewhat spared from the tech-led bust that has gripped office markets in San Francisco; Seattle; Austin, Texas; and other cities, said Jonathan Miller of Lend Lease Real Estate Investments, publisher of the nationwide survey Emerging Trends in Real Estate 2002.

"It remains to be seen how far down we go and how long this recession lasts," Miller added. "But we expect 2002 to be the nadir for the real estate industry."

While San Diego is holding up overall, some suburban markets favored by tech companies have seen climbing vacancy rates lately.

Sorrento Mesa and Carlsbad have office vacancy rates above 20 percent, according to figures released this week. Del Mar Heights and University Town Center also have more empty offices now than they had nine months ago. One building in Sorrento Mesa's Sea View development was vacant for so long that it was jokingly referred to by brokers as the "See Through" building -- a common industry euphemism for long-empty structures.

All of which has led some industry experts to remain cautious in their forecasts for the future.

"From our perspective, San Diego is weathering the storm," said Jeff Burges, chief operating officer for Yale Properties USA, a commercial real estate investment and management company. "The question in our minds is whether the wave just hasn't hit Southern California yet. It's an uncertain time right now."

In the '80s, easy money flowed to developers, who built too many office and industrial buildings, Burges said. This time, easy money flowed to technology entrepreneurs with ill-conceived business plans.

The problem for commercial real estate owners, he said, is that these entrepreneurs are their tenants.

"I think what we're going to find is the companies we built (buildings) for may not be as viable as we would have thought," Burges said.

But Stath Karras, chief executive of Burnham, said San Diego tech companies aren't going out of business. The spike in vacancy rates, he said, is because many companies leased more space than they needed in anticipation of expanding. Now they've put those plans on hold, and consequently are trying to sublease their unused offices to other companies.

Economist Alan Gin of USD said he expects the current economic slowdown to last into the second quarter of 2002. He said local companies that supply national and international manufacturers, as well as the region's tourism and retail sectors, will be hit hard.

Gin added, however, that San Diego should outperform the nation as a whole because its economy is much more diversified than it was in the past.

"The companies here in San Diego are smaller, a little bit more nimble and better able to deal with adverse situations," he said.

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