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What do I see on the Horizon for San Diego Real Estate?

​​I am an experienced real estate financing professional who has worked through several business cycles. I have learned to see trends emerging that affect the real estate market based on real estate loan requests.

What I currently see on the horizon for San Diego real estate is based on information I receive from conversations with real estate owners, lenders, borrowers, buyers, and sellers in the San Diego market. This provides valuable information as to what changes are developing.

We are well into the COVID pandemic, which has fundamentally changed the way we do business. We are now starting to see the effects on the real estate market. I believe we have only begun to scratch the surface of the changes. There will be winners and losers in specific real estate market segments.

What’s different today from the recession of 2009-2011? Today, we don’t have an oversupply of real estate. We don’t have huge vacancies in most submarkets. We don’t see an industry-wide decline in business profitability. For example, some businesses are doing better than ever before, and many people are making more money than they ever have made.

I want to comment on the changes coming to help investors capitalize on the opportunities and arrange debt financing for maximum security.

Where do I see Interest Rates Going?

I see long term interest rates ticking up. There are several contributing factors: Change in the political climate, a decrease in the value of the dollar, an ever-increasing national debt.

Long-term interest rates are now at such a low rate that a slight increase is not a bad thing. An increase in interest rates will benefit financial institutions, not only for their valuations, but a rise in rates will slow down the loan volume and allow financial institutions to serve their clients better.

Capital continues to flow into US Treasuries, thus supporting the low long-term rates. However, as the global economies improve, I believe the flight to safety in US treasuries will slow down, thus increasing long-term rates.

What Segments of the Real Estate Market to Avoid?

The retail and office markets will be the biggest losers.

I believe the pandemic has caused a permanent shift in people’s psyche with the fear for their health and safety. This has changed work patterns and how people transact business, evidenced by the massive spike in e-commerce.

The retail type space where people gather in tight quarters will be the hardest hit, e.g., indoor restaurants, gyms, banquet venues, etc.

In the office space, businesses have been forced to allow people to work from home, looking to be successful and cost-effective. Therefore, I believe the decline in the need for office space is not temporary, resulting in opportunities to purchase office properties at a discount to reposition them into the highest and best use, e.g., office space converted to residential housing/mixed-use.

What Segments of the Real Estate Market do I see the Most Opportunity?

Industrial space and residential housing are the segments of the market with the highest upside.

E-commerce has forever changed how we do business, which requires more industrial space for storage, distribution, and back-office use. A great example of this transition is Amazon exploring the option to take over vacant mall space throughout the country for distribution purposes.

The lack of supply in single-family residential, demand for multi-family housing, and the aggressive density allowances have created opportunities for those experienced investors who can create the added value.

However, downtown high-end residential condos and multi-family housing will struggle with an increase in supply and more demand in the suburban residential markets for more affordable housing.

The uptick in interest rates that I believe will happen will slow down the red-hot residential housing market, but only slightly, bringing it down to a more normal level.

Experienced entrepreneurs who can capitalize on the downturn will have the opportunity to purchase commercial office and retail/restaurant properties at a discount and reposition them for the highest and best use.

Where should we go From Here?

Stay focused on what we do best, and don’t deviate from our expertise when it comes to investment opportunities.

None of us know the exact future of the San Diego real estate market. However, I believe signs are on the horizon investment opportunities are coming. I am optimistic we will collectively weather this storm and individually have the opportunity to make some great investments.

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