By Thor Kamban Biberman

As published in The Daily Transcript, November 11, 2003

San Diego's commercial real estate market is recovering faster than in other parts of the country because it didn't fall so far, according to economists at a meeting sponsored by University of San Diego's Real Estate Institute Friday.

"The economy is picking up, and the Fed reports that a rebound is in the cards," said Mark Schniepp, the senior economist to the California State Controller. "Home sales are practically on a record pace. The only downside to the U.S. story is no job growth. That's going to come along though."

Schniepp then pointed out that the one component that isn't going to come back strong is the manufacturing sector, which could have major implications for industrial space - space that is enjoying single-digit vacancies in many of the county's submarkets.

Former Labor Secretary Robert Reich said on National Public Radio last week that the problem is not so much that America is losing manufacturing jobs to other countries, rather, manufacturing is declining globally as it becomes more automated.

Schniepp said that despite record high housing prices and the departure of some local companies, most companies are electing to remain in Southern California. That is good news for commercial real estate in San Diego. What's more, Southern California continues to be "at the center of the universe for many technologies."

The down side is that Schniepp doesn't predict any significant job growth for what little remains of this year, and foresees only modest growth in 2004.

Schniepp said construction is very high in the state on the residential side. Commercial is lagging, but he expects the strong residential market will also help some commercial projects lease up.

Schniepp noted that even with all the residential construction, this region currently has a housing deficit of 100,000 to 150,000 units. He expects the problem will get worse.

"If you think the demand for housing units is strong now, just wait," he said.

Dr. Alan Gin, USD associate professor of economics, gave a view of the jobs picture, and how it might impact commercial markets.

Gin said while on this particular day there were reports of a 125,000 gain in jobs in September nationally, a great deal of uncertainty still permeates the jobs picture.

"While we've had three consecutive months of employment growth, manufacturing employment has been down 39 months in a row," Gin said.

He also said interest rates that have climbed as much as 100 basis points in recent weeks, coupled with a rising budget deficit and a weakening dollar, have made it more difficult to attract foreign investors into this market.

Gin added that it doesn't help that more than 40 states around the country are having budget problems.

For Gin, the budget problems have hit close to home. "The person who was supposed to supply me with employment data was laid off," he said.

Gin said not only are the manufacturing jobs going overseas, but he is seeing that this is increasingly being carried into the white-collar sector.

"What we are seeing is the Wal-Martization of the economy," Gin said. "Most Americans are working in relatively low paying jobs."

Gin said he expects the country's gross domestic product (GDP) to climb in the 3 percent to 3.5 percent range in the coming year, but that it needs to at least get into the 4 percent range for the economy to start to get healthy again.

Locally, San Diego County was adding an average 45,000 new jobs per year from 1997 to 2000. This year, Gin expects that figure to only be about 2,500.

We've not had the pick up in service jobs that were necessary to offset the losses in the manufacturing sector," Gin said.

As slow as this is, however, the region has yet to see a net loss of jobs, as is the case in many other parts of the country.

Gin did say that while last year marked the first time in modern times that shipbuilding outpaced aerospace production in San Diego, that a diverse collection of industries should keep commercial real estate space relatively full.

"The key is going to be job growth," Gin said.

James Munson, Burnham Real Estate Services principal and managing director, said San Diego is already seeing signs of recovery, and also said this region will rebound quicker because it didn't fall so far.

Munson said even though the region's slowdown started about 1.5 years after the rest of the country, it is emerging from its doldrums at about the same time.

Slowdown, or not, Munson said biopharmaceutical firms have lured $97 million in venture capital funds, and health service and medical devices have garnered $131 million in venture capital funds this year.

Munson said these kinds of numbers will help push the countywide office absorption to 2 million square feet this year. The countywide office vacancy is running at about 12 percent.

Munson noted that the arrival of such firms as the Paul Hastings Janofsky & Walker law firm, The Memec Group semiconductor firm and the Fair Isaac & Co. business consulting firm, filled space in Del Mar Heights that had gone begging after the Peregrine Systems bankruptcy. "Del Mar Heights has rebounded very strongly," he said.

Munson said even with a slowdown in manufacturing here, about 3 million square feet of industrial space should continue to be absorbed this year and the next.

Gin may have some concerns about foreign investment, but investment activity in 2003 was a very healthy $1.3 billion for office buildings, including some trophy buildings such as One America Plaza downtown and The Aventine in North University City.

Retail investment thus far this year is also a strong $603 million, and investors have put in $493 million to acquire industrial properties in 2003, according to a Burnham survey.

Munson said retail vacancy, which is already just 2.7 percent, should continue to decline next year and office vacancy will decline about 1 percent next year to approximately 11 percent. Industrial absorption may be on a par with next year, but 3.1 million square feet were also recently added to the market. This means there may be a little change from the 8 percent vacancy figure.

The event concluded with a discussion how the 2005 Base Realignment Commission (BRAC) closures could impact San Diego.

William Cassidy, BRAC 2005 consultant to the city of San Diego, said he doesn't know how San Diego will be impacted by BRAC, but that it will be profound, whatever it is.

Cassidy said the military represents a gross regional product of about $18 billion annually, and this affects every sector of San Diego's economy.

However, the military does not have the influence it once did. In the Reagan era, the Navy had about 900 active duty ships. Today, they have 290.

"And the DOD (Department of Defense) estimates that it still has 25 percent excess," Cassidy said.

Along with the tens of thousands of military jobs, Cassidy said there are about 7,000 high wage civilian jobs that could be at peril by the realignment. The number of civilian employees exceeds 3,000 for the Space and Naval Warfare Systems Center (SPAWAR) alone.

Rear Admiral George Wagner, a Northrop Grumman executive who was responsible for overseeing the move of SPAWAR from Washington D.C., to San Diego a few years ago, suggested that while there will undoubtedly be changes, expects the city will fare well because of its strategic importance.

"Trying to relocate SPAWAR (again) would be very costly," Wagner said.

However, this is not to say that there won't be pressures to consolidate the functions that are currently here.

Cassidy said The Marine Corps Recruit Depot is considered to be at risk, as is SPAWAR, as well as the Naval Air Depot San Diego at North Island.

SPAWAR represents 4,000 military and civilian employees and a $286 million payroll. The average job at SPAWAR pays $71,500 annually. MCRD, along with the thousands of recruits who are processed, has 2,600 permanent personnel. Both are proximate to each other and the San Diego International Airport.

When asked why MCRD's functions couldn't simply be consolidated at Camp Pendleton, Cassidy said it would be inappropriate to co-locate recruit and operational troop training functions.

"Enough is going on at Pendleton," Cassidy said. "Additional activity would not be productive."