A Sizzling Market: The San Diego
Real-Estate Market Remains Hot

It is no secret that San Diego's real-estate market has been hot for some time. It is less clear how much hotter it can get before burning out.

So far, demand for a piece of the storied Southern California lifestyle remains strong. Though the pace of the housing market has cooled slightly, the region's median home price has risen to $605,600, the nation's third highest after San Francisco and Orange County, Calif., according to the National Association of Realtors. Investors are snapping up apartment and office complexes at prices that weren't only among the richest of the sizzling West Coast markets but in the nation, according to research firm Real Capital Analytics Inc.

The Navy Broadway Complex in San Diego, located on prime waterfront property, is slated for redevelopment as a multi-use property with office, retail and museum space.

Meanwhile, the U.S. Navy is under pressure from the Base Closure and Realignment Commission to choose a developer by 2007 to revamp a more than 14-acre parcel of prime waterfront property. The site, known as the Broadway complex, could gain as much as 2.9 million square feet of office, hotel, retail and museum space. "We've got a lot of momentum now," Mr. Luker said.

The San Diego real-estate market is no stranger to booms and busts. It suffered a severe downtown in the early 1990s, crippled by a glut of office space, a national recession and cuts in defense spending that hurt the region, home to the Marines' Camp Pendleton as well as one of the largest concentrations of U.S. Navy personnel with more than 90,000 sailors.

The economy has diversified since and unemployment fell to 4.3% in August from a high of 5.7% in June of 2003, according to the Bureau of Labor Statistics. San Diego's apartment, retail and office sectors are some of the healthiest in the country with vacancy rates that are among the lowest of any major city, according to Property & Portfolio Research Inc., a Boston-based real-estate consulting firm.

The low vacancy rates have spurred construction, but supply has been tempered in part by a scarcity of land in the densely populated region that is hemmed in by the Mexican border to the south and the Pacific Ocean to the west. Office developers say they aren't concerned about overbuilding.

"Having a couple hundred thousand square feet of office come on line every 1½ years is pretty insignificant," said Jason Wood, director of development at Cisterra Partners LLC, noting that the larger projects won't all be completed at the same time. "I'm almost wondering if it's enough." Cisterra is constructing a 325,000-square-foot office building next door to Petco Park that will open in 2007. Last month tenants began moving into the downtown's first new high-end office building since 1991. The 23-story Broadway 655 building is located just blocks from the Navy's Broadway complex.

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