THINGS TO KNOW ABOUT THE CURRENT CRE MARKET CYCLE

Commercial real estate follows a cyclical pattern, often linked to both local and national economic trends. Commercial real estate investors need to understand that cycle and how it works. Real estate regularly goes through multi-year cycles of boom and bust periods. These cycles have been broken into four periods: recovery, expansion, hyper-supply, and recession. Using the "real estate cycle" while looking at the San Diego industrial market can assist in predicting upcoming trends and can provide a better understanding of what is currently happening in the market. 

The real estate cycle consists of four phases that the market moves in and out of. By looking at the characteristics of the San Diego industrial market, we can place San Diego just entering Phase 2 of expansion in the real estate cycle. Looking back at the beginning of 2020, San Diego has experienced high rent inflation along with record-high leasing activity in 2021 despite COVID-19 restrictions. We expect that the market price/rent per square foot will continue to increase in all counties of San Diego based upon data from previous quarters. We also predict that vacancy rates will decline, especially in specific counties such as South County. Another sign we are in Phase 2 of expansion is that the market is very tight in several areas, making it difficult for small businesses to find desirable spaces. As the removal of COVID-19 restrictions finally came, small and large businesses alike were preparing to go back into in-person settings and searching for spaces to either downsize or expand. Even with limited options, businesses are ready to get back and recover from the losses due to the pandemic. 

However, many development projects in progress during 2Q21 should be completed soon, which could offer more space to the market and benefit the San Diego economy. Otay Mesa in South County is a good example of how we can understand San Diego's phase 2 position of the real estate cycle. Otay Mesa has been an ideal location for new developments such as e-commerce giant Amazon and their 3.4 MSF distribution center. Otay Mesa is a growing market with their continued new construction. The rates in Otay will no longer be as ideal as in the past due to corporations' high demand for space in the area. In Central County, large biotech firms like Pfizer are responsible for creating a great number of jobs as well as smaller life-science firms funded by venture capital have helped to show low vacancy rates and high prices per square foot. 

As mentioned, San Diego is beginning its entry into Phase 2 of the cycle, and we feel confident that San Diego will be in this phase for some time. However, one factor that may alter its position is if interest rates were to increase. Increased interest rates is a very realistic potential risk that San Diego needs to be prepared to face. The change in interest rates could cause the market to soften, which will cause price property growth to lower. It is important to closely follow the change of interest rates because if interest rates increase, San Diego will enter Phase 3.