April 18, 2024

Illuzzi Letter

Envisioning And Creating Your Dream Home

San Diego Commercial Rental Property

If you are looking to diversify your real estate investment portfolio, a step toward the San Diego commercial rental property market may not be a good option for you.

Many San Diego investors looking to remain loyal to their home market have been wondering if investing in a different property class is a good way to stay local. These investors are hoping to ride out overall changing market conditions by staying local because (1) they know the area and (2) they are nervous about investing elsewhere. They want to believe that they may find shelter (and hopefully a little profit) in the San Diego commercial rental property market.

However, the latest news from the San Diego commercial rental property market has not been encouraging. Local investors are finding out that much of the market here has been tapped out. The latest numbers show that there are very few suitable replacement properties available for a 1031 exchange for the following reasons:

-Values have increased so much in a short period of time.

-Even though many San Diego sub-markets have thousands of square feet of vacant and otherwise available square feet of space to lease out, there other factors that come into play that make this market an undesirable one. For example, in recent years, these under-occupied buildings have been bought and sold, in some cases numerous times, for prices that defy reason. Every time a sale takes place, the county tax assessor takes note and adjusts the property tax to roughly 1.2 percent of the property’s new sale price. An increase in property tax impacts operating expenses involved in running the property. It becomes necessary to charge higher rents to regain those costs and you are dumped with the burden of competing for tenants on price.

-Many building owners have floating interest rates that are trending upward and are very likely to continue to do so.

-Add the average 22-month period in which vacant space in downtown Sand Diego’s office buildings remains unoccupied and one can see why building owners aren’t sleeping all that well at night.

So if you are considering diversifying your investment portfolio by investing in San Diego commercial rental property, for now, you may want to think twice and even three times before taking the plunge.