San Diego so far has weathered the storm, mostly missing the economic bust that has rolled across much of the nation because the events of Sept. 11 failed to take a significant toll on the local real estate markets. While the commercial markets have slowed and the higher-priced residential market has been sluggish, the local economy may pass through this negative cycle relatively unscathed. Possible, not certain.

The danger is this: if the national economy falls into a second-dip recession, the region simply does not have the legs to withstand a lengthy period of national decline. So far, we have persevered because:

• We have a healthy diversity of employment spread out over many employment clusters. Pointedly, the “tech wreck” impacted our technology sector, but did not spread to other sectors.
  
  
• A strong visitor industry represents a dependable economic base, while in other regions it is a cyclical sector subject to economic downturns. In other words, people always visit San Diego.
  
  
• A strong military base is coupled with an expanding defense industry, a residual benefit to the war on terrorism. I cannot foresee a scenario where our military presence of about 110,000 uniformed personnel doesn’t help the economy — unless they all get shipped out.
  
  
• Quality of life issues, like weather and recreation, keep drawing companies and encouraging young retirees to start new businesses, particularly in the life sciences. This unique research and development component has the potential to create periodic explosions of discovery and new jobs.

History As A Guide

However, historical precedent leads to the argument that San Diego’s economy turns down later than the rest of the nation. We turned off for almost four years beginning in 1991 while much of the nation turned on after an earlier (1989) economic downturn. A similar downtime took place from 1982 to 1986 when the national economy was in recovery.

That kind of downturn is unlikely to happen because we have a different economy. San Diego is not a single-industry town, as was the case during earlier years of dependency on aeronautics and defense contracting. It would take cross-cluster explosions to bring us down hard and fast at this point. Also we are a much bigger region in terms of employment and population, and much of our growth is beginning to be fueled by natural increase — more births than deaths — meaning that we cause our own demand for goods and services.

Since Last Sept. 11

The impact of the terrorist attacks on the San Diego real estate industry was mostly psychological. The cycle went like this:

• Market comatose for the first 60 days.
  
  
• Post-traumatic stress syndrome during the holidays.
  
  
• Early recovery during the first quarter of this year.
  
  
• Partial recovery since then.

So, we are not back on our feet yet.

The commercial markets already were headed for a downturn prior to the events of Sept. 11. This day of infamy took us over an edge rather than leading us to it.

The major impact on the commercial and housing markets was the cessation of projects and construction for one to two months while companies paused for a breath to reorganize and restrategize.

The events certainly did impact the visitor market. Yet this was temporary, and the visitor industry is nearly recovered, thanks to a strong convention and leisure market.

The Next 12 Months

A real estate malaise relapse is possible, but not probable. The residential market started slowing at the upper price range well before Sept. 11. What has sustained its energy has been:

• The imbalance of supply and demand. It is the failure to build the number of dwelling units we need to meet demand that is driving the market.
  
  
• Low mortgage rates: I never thought I would see the day when mortgage rates dropped again to below 6 percent. This has contributed to the frenzy.
  
  
• Prices are going up almost exclusively in the under $500,000 market.
  
  
• The lack of the right kind of housing. Hardly anything is being built under $300,000 except some minor condo conversion activity, and some housing in South County and South Riverside County.

The rest of the market has cooled. So, if prices go down in a receding market — with these interest rates — we may even see a second rebound.

Here is how that scenario could play out: an erosion of the pace of the current activity; prices dropping on for-sale inventory; the national recession keeping interest rates down for the foreseeable future (bet on it); consumers quickly realizing that housing affordability is greater than ever with the confluence of low mortgage interest rates, some lagging resale inventory characterized by longer sales listing periods and price reductions to move this inventory; another frenzy ensuing; resulting, ultimately, in another round of pricing bid ups.

For the multifamily market, apartment rents probably have reached the end of their upward swing for this cycle. I do not see rents declining, but I do see them flattening. Owners of income property are holding firm to their properties; if they are selling, they have been firm on pricing, suggesting that this will remain a relatively low activity property transaction period with sellers holding the cards. Rent reductions are unlikely, but so are large increases.

The hotel market bounced back much quicker than any other market in the nation. It is lagging a point or two behind seasonal averages in terms of occupancy, but room rates are back to about where they should be. The Super Bowl is coming, the weather has been great and visiting traffic from Greater Los Angeles still loves us.

The office sector will remain the weakest player in the real estate market. With regional vacancy rates at 11 percent to 12 percent and 15 percent or more in the north cities markets, a lot of vacant space is available. It will take well into next year, assuming no local economic slowdown, for this sector to recover. If the economy dips, it may take much longer. Lease rates have slipped. The silver lining is that opportunities abound for those companies moving in or anticipating expansion.

The industrial sector is remarkably strong, posting vacancies at a tick above 6 percent, principally because of little speculative expansion during the past several years. In other words, buildings were built only if there were tenants, a good thing when companies are in compression or in steady state.

On balance, my bet is that after a more sensible period of slowdown, perhaps lasting the better part of the next six months, the region will still be strong. It is not guaranteed, but don’t expect a double dip or any major devaluation beyond that which has already occurred. Only an “outlier” incident such as war or famine would likely represent serious calamity for the foreseeable future.

Gary H. London is president of The London Group Realty Advisors Inc., providing real estate consulting and economic analysis. Check him out on the Web at www.londongroup.com