Posted By: Eugene Taylor

The high cost of housing continues to hurt homebuyers, the retail real-estate market is getting much-needed inventory and the community should be able to absorb the thousands of new hotel rooms that are mostly being planned for downtown San Diego.

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These are just a few of the conclusions reached in the San Diego Regional Chamber of Commerce's 2007 Economic Outlook.

The report says the county continues to add roughly 25,000 new people each year, most of which represent births over deaths.

"Domestic migration (into this county) slowed considerably in 2003 before turning negative in 2004, 2005 and 2006," the report said. The majority of the departures are people aged 20 to 34, despite the fact that the region has continued to offer good jobs.

The region's median household income is projected to climb from $67,200 at the end of this year to $69,600 next year, but is still a far cry from what is needed to get into homes that start in the $550,000 to $600,000 range.

The California Association of Realtors in August showed that in San Diego County, the second quarter affordability index was 21 percent, the same as it was in the first quarter. In the second period of 2005, it was 23 percent. That represents the percentage of households that could afford a median-priced home.

The CAR showed that the first-time buyer median price in San Diego County in the second quarter of 2006 was $521,120. That price would require a monthly payment, including taxes and insurance, of $3,560 at then-current mortgage rates. Such a monthly payment would require a minimum annual qualifying income of $106,730.

The departures and affordability issues mean at least a temporary decrease in demand for new for-sale housing. The report said the number of single-family permits dropped from 9,554 in 2004 to 7,886 in 2005, and are expected to drop to 4,600 this year, before climbing to about 7,000 in 2007.

The report says the current glut of condominiums notwithstanding, the region still has about a 100,000-unit housing deficit that won't be addressed unless it becomes easier to build.

The Chamber said that housing prices have been dropping and the San Diego and the Riverside/San Bernardino markets are expected to lead the declines. It will outpace the rest of the state in the meantime, it said. This price decline is expected to continue for a year or two more before finally bottoming out. Condominium conversions have seen their prices drop the quickest of all, the report said.

"Markets having the greatest exposure to inflated housing prices may have the most difficult time dealing with the fallout while areas with only moderate price gains will mostly proceed undisturbed," the report states.

"San Diego's retailing has been a particularly strong market for the past few years, with an overall vacancy of 2 percent. More than 3.6 million square feet of space is under construction. Most of it in the outlying markets of east Chula Vista (the 813,000-square-foot Otay Ranch Town Center being the main project there) Temecula and Murrieta," the report continued.

Citing its own research and data from CB Richard Ellis (NYSE: CBG - news), the Chamber said while the retail market remains extremely tight, projects in these outlying areas have provided at least some space for tenants.

The market looks strong today because of some large projects such as the new 1,200-room Hilton on the Campbell Shipyard site and major hotels from Chula Vista to Oceanside, which are expected to eventually impact occupancy.

The Chamber said San Diego's hotel occupancy averaged about 72 percent with an average daily room rate of $122 in 2005, numbers that would appear to justify new construction.

Another 412 rooms are to be added this year, although this includes a newly re-opened U.S. Grant, with 285 rooms. Other additions included expansions at the Hotel del Coronado and the Grande Colonial La Jolla. Additional rooms are being constructed at the La Costa Resort & Spa as well.

Hotels that will either be under construction or completed next year include The Grand Del Mar & Spa in the Carmel Valley area, The Hard Rock Hotel downtown, the Gaslamp Residence Inn and The Westin at La Jolla Commons in University City.

The Chamber report said San Diego's office market is good, but that space won't be filled as quickly as in recent months. Still, the Chamber generally likes what it sees. "The outlook for the office market is positive with an expectation of continued job gains and the economy continuing to produce demand..." the report stated. "Tenant demand for office space in San Diego has been relatively steady as the county absorbs newly completed construction..."

The Chamber report said that while the third quarter 9.7 percent office vacancy was a slight increase from the prior quarter, this compares favorably with Los Angeles at 10.3, and the national vacancy rate of 13.2 percent.

Office rent increases have been experienced in Del Mar Heights, UTC, downtown and Mission Valley, even though Mission Valley had 125,534 square feet of negative absorption through the first nine months of the year, by CB Richard Ellis' accounts

CB Richard Ellis reported 611,464 square feet of office space was absorbed countywide in the first three quarters of the year, but some 3.29 million square feet of space was under construction -- a situation expected to increase the vacancy rate by 3 full percentage points to 12.7 percent by the end of next year.

"Markets having the greatest exposure to inflated housing prices may have the most difficult time dealing with the fallout, while areas with only moderate price gains will mostly proceed undisturbed," the Chamber report stated.

Construction jobs have been feeling the effects of the housing downturn, and skyrocketing material costs have done nothing to help matters. The report does say, however, that in many cases commercial and industrial construction have taken up the slack.

CB Richard Ellis's latest report said that while there was more than 3.94 million square feet of industrial space under construction as of Sept. 30, roughly 3.38 million square feet of completed space was absorbed through that date. While industrial activity was strong, it dropped off in the first half of 2006 in most markets in the country, the Chamber report said.

That hasn't been the case here. San Diego County's industrial vacancy stood at 5.4 percent as of Sept. 30, as noted by CB Richard Ellis -- a tight market by anybody's standards.

"The San Diego industrial market appears strong as demand continues to be steady," the Chamber noted.

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