San Diego’s Up Cycle Continues, UCSD Plans Massive Expansion, Co-Working Gets Specialized And Virtual Reality Replaces Model Homes
San Diego continues to see transaction activity, even with interest rates rising and lenders tightening loan criteria, according to Seth Grossman, managing director for Meridian Capital Group, who discussed the lengthening real estate cycle at Bisnow’s recent San Diego State of the Market event.
“We’re at the high price point, but there’s a lot of capital out there waiting to be placed. There’s no shortage of debt and equity. People are buying at 3 to 4 caps, but there’s no bubble,” he said. Grossman said today’s market feels different than it did at the height of the market in 2007.
“Properties are selling at a steady pace, but it’s not overheated,” he said. “It feels comfortable and more diverse — lenders were doing ‘bonker’ things last time around, lending money they shouldn’t have.”
“It feels like the sixth or seventh inning. If the sun stays out, it will probably be a double-header, as there’s lots of capital available. People are ‘thinking outside of the box.’ Everyone is thinking about different ways to create value,” he said. “Properties are selling for tighter cap rates, so buyers are thinking about ways to squeeze a little bit more juice out of deals.”
Fastest-Growing Office Segment: Co-Working
Moderator David McCullough, principal at McCullough Landscape Architecture, said co-working is the fastest-growing area of the office market. He asked WeWork’s Jon Slavet about current trends in this office sector and how it may evolve over time to fit specific user needs. There are 900 co-working locations in London, 15 of which are WeWork spaces, Slavet said.
“What’s going on in London speaks to global demand for co-working space. In San Diego, there are 15 or 16 co-working locations, including WeWork. This is a market [that] is a young market, so there will always be room for local operators catering to different segments,” he said.
WeWork will increasingly become more specialized by types of users, Slavet said. The company is beginning to customize space to iconic brands and will cater to companies that require larger spaces than in the past. Pointing out 70% of WeWork’s leadership is female, he said there is also a proposal to support female entrepreneurs by creating locations where the majority of members are female-owned companies.
WeWork is all about member experience, Slavet said. Parking, which is fundamental to member experience, is the biggest challenge WeWork faces in San Diego.
“We need a partner to help us figure the parking situation,” he said.
WeWork opened a 90K SF location at 600 B St. in December, its largest co-working facility in Southern California. Occupying six levels, the location includes a 7K SF rooftop amenity space.
Explosion of Development at UCSD
Jeff Graham, executive director of real estate at the University of California San Diego, said a perfect convergence of a dozen or more factors has caused an explosion of UCSD real estate development, including an anticipated increase in enrollment by 10,000 students over the next five years. He said the university is investing $2B in real estate over the next five years, and 15M SF of development is in the pipeline or planning stage.
“The extension of the [Trolley] Blue Line to UCSD is causing a rethinking of the way the campus is growing and was the impetus growing into downtown,” Graham said. “It was that linkage that gave us the idea that we could go from La Jolla into downtown and bring to that community a synergy of resources and commercialization.”
He said the UCSD chancellor believes the university should play a stronger role in community development and bring arts and culture out into the community.
Tony Pauker, Brookfield Residential’s senior director in San Diego, suggested there is a massive mismatch in San Diego's housing development.
"[The problem] is bigger than us,” he said.
UCSD is pumping out graduates in technology and engineering fields that will go elsewhere due to the cost of housing, Pauker said. He blames the city’s lengthy entitlement process for running up the cost of housing and ultimately losing talent created at local universities.
Virtual Tours Replace The Model Home
Pauker said a large portion of homes Brookfield will complete in this cycle are legacy projects planned in the last cycle, as it takes three to 10 years to get projects through the entitlement process.
“If we start a project today, it will take three years before we have a model home to show. The longer it takes, the more pressure on price,” he said.
As a result, he said Brookfield is replacing the model home concept with virtual reality at a new for-sale single-family community in San Marcos, Calif. Virtual reality allows prospective buyers to see how the various floor plans look with furnishings, Pauker said.
Brookfield is building single-family homes at Rancho Tesoro, a new 250-acre master planned community under development in San Marcos.
CORRECTION, MARCH 30, 7:26 P.M. PT: A previous version of this story had the wrong address and number of floors WeWork occupies at its San Diego location. The story has been updated.
