San Diego is Known for This Type of Office

Prendergast: “The economy continues to remain stable here in San Diego. Many places around the US cannot make that claim.”

SAN DIEGO—Most of the office buildings in San Diego are less than 150,000 square feet, unlike our neighbors to the north, so transaction size tends to be smaller, JLL managing director Bob Prendergast tells GlobeSt.com. We spoke exclusively with Prendergast about San Diego office investment trends and untapped potential for this market. GlobeSt.com: What type of San Diego office product is seeing the most investment demand, and why? Prendergast: San Diego is home to the “medium-sized” building. Most of the office buildings in San Diego are less than 150,000 square feet. Unlike our neighbors to the north in Los Angeles, Irvine and San Francisco, our building are smaller, and therefore our transaction size tends to be smaller. Approximately 80% of our transaction volume falls in transactions less than $25 million. An exception will be larger buildings in downtown San Diego, Mission Valley and UTC or in the high-value markets like Del Mar Heights. Traditional multi-tenant office property remains a dominant investment category, from North County (Carlsbad) down through all of the major submarkets. Corporate dispositions (for example, the HP campus in Rancho Bernardo and Sundstrand in Kearny Mesa) and corporate acquisitions ( Intuit ) are strong, the life-sciences industry continues to expand, and as a result some of its leased properties will come to market. GlobeSt.com: Where is there untapped potential for office investors here? Prendergast: The economy continues to remain stable here in San Diego. Many places around the US cannot make that claim. We have a balanced, multi-faceted economy, which is critical to attracting a consistent flow of investment capital . Given the high barriers to new, ground-up development , investors will move toward value opportunities. They will seek out properties where rents are below current market rates or assets with near-term tenant rollover opportunities. Investors will also seek out properties where new capital infusion will “change the face” or “change the use” of the property. For example, taking a 1980s vintage flex/R&D property and repositioning the property for a new, expanding tenant base looking for creative office or suites offers tenants a new sense of place. GlobeSt.com: What do you see as an emerging trend in office investment? Prendergast: San Diego will continue to see minimal new supply. High-demand submarkets such as UTC and Del Mar Heights will see speculative development from the well-capitalized investors. Land sales have increased, with development sites along SR 56 and 4S Ranch transacting. There are few “ greenfield ” sites available in San Diego, so we seeing more “adaptive reuse” projects where investors repurpose older obsolete properties and renovate them to appeal to today’s sophisticated tenant requirements. Sorrento Mesa has been the hub for this product type, led by Bixby Land ‘s the Oberlin , Locale Advisors’ the Yard and Cruzan’s Make up in Carlsbad. Steelwave has pioneered the repositioning of both single-tenant and multi-tenant properties, focusing on the life-science properties like Moda Sorrento and Torrey Ridge on the Torrey Pines Mesa. Phase 1 Property has also focused on speculative larger-tenant office and life-science properties in UTC. GlobeSt.com: What else should our readers know about San Diego office investment? Prendergast: The office market in San Diego is mature. It has been through all of the cycles over the years. We’ve seen development cycles in the mid to late ’80s and witnessed the S&L crash of the early 1990s, the tech bubble and the Great Recession . Investors have a track record on how our multi-faceted economy has performed through these cycles. Investors look at San Diego as a vibrant and resilient market. Investors have established a risk profile for our economy and the types of properties that support the economy. San Diego is constantly being compared to other markets across the western US and with markets across the country. Capital, both debt and equity , flows quickly and efficiently. One moment, we may have 10 active investors and the next moment we will see three or four. We see the market being efficient, and transactions are making it across the finish line, which shows that San Diego is still a market where investors will seek out appropriate risk-adjusted returns.