Why Office Investment Is ‘Tough’ In San Diego

Office investment in San Diego is challening for investors—because there are so few opportunities. Vista Investment Group recently completed its second purchase in the market in the last 12 months, and says that when they can find opportunities in the market, they move quickly. However, it is rare that acquisition opportunities come to market in San Diego, because most owners are not looking to sell. The firm’s latest purchase was the 140,107-square-foot Seville Plaza in Kearny Mesa, and in September of 2017, it purchased Plaza 2020, a 105,796-square-foot class-A office building in Mission Valley.

“We like San Diego because it is a global city and it is a young, well-educated town. There are great universities, a big clean-tech and biotech infrastructure and a great quality of life,” Jonathan Barach, president and co-founder of Vista Investment Group, tells GlobeSt.com. “However, San Diego is a tougher nut to crack because it is more insulated with less deal volume than some of the other major markets on the West Coast, like Los Angeles, Seattle or the Bay area. We like San Diego, but it is harder to uncover opportunities and there are higher barriers to entry. When we do see a good opportunity, like Seville, we jump on it.”

The limited opportunities for office investment are likely an effect of a largely private ownership base. Many office properties in San Diego are privately owned, compared to the institutional ownership structures dominant in Los Angeles and San Francisco. “There are fewer big trades, and the market is more disintermediated than markets like the Bay Area, which is more institutionally owned,” says Barach. “I think that the types of owners are less trade oriented and are, instead, more generational owners. San Diego acts like a small town, even though it is a big city.”

Despite the limited investment office opportunities, pricing has remained flat. This is a stark difference to multifamily and industrial asset classes, which have seen accelerated appreciation as a result of the demand. “San Diego has always been pretty tight,  but commercial appreciation has been pretty flat in the last six to 12 months,” says Barach. That is true for the firm’s Seville acquisition, as well, which Barach says—at $27.5 million—was one of the lowest prices per square foot for an office property in the market this cycle. “We are very happy with the price that we closed at, and we think it is a great basis for us,” he explains. “It is one of the lower price per square foot trades this cycle in the market. It allows us a lot of optionality to do various things with the property because we have such a low basis in it.”

Vista focuses on value-add office investment throughout the West Coast, however, it adjusts it strategy to fit the market. In San Diego, which has a unique and diverse office user pool, the strategy is property and submarket specific. “We have a different strategy for every market because each market has different nuances. San Diego is a prime example of that,” explains Barach. “San Diego does have the tech and creative office and the other newer phenomenon that we are seeing elsewhere, but it is on a smaller scale and it is more nascent than a market like San Francisco, which is really the epicenter of that.”

As a result, Vista is selective in choosing investment properties in the market, which, paired with the limited for-sale opportunities, adds an additional challenge to investing in the market. “When we look at opportunities in San Diego, it is dependent on the particular submarket of San Diego and the strategy of the deal,” says Barach. “We are not going to take a strategy that has worked well in San Jose and implement that in San Diego because we would fail. The companies are smaller in San Diego, and typically when they become big, they move out of San Diego. There are a lot of things that you need to be cognizant of when you are looking at a new deal in the market.”