By Joshua Ohl
CoStar Analytics
July 7, 2021 | 1:48 P.M.
Investment volume in the San Diego office market reached a 15-year high during the second quarter, shattering the relatively staid investment market amid the ongoing pandemic. Almost $1.3 billion was invested in San Diego office properties during the quarter, driven by a collection of portfolio deals from Sorrento Mesa to downtown San Diego.
Given the drop in demand for office space and the uncertain path to a linear office recovery, market pricing — which is based on the estimated price movement of all properties in the market and informed by actual transactions that have occurred — has flattened over the past 12 months, as have capitalization rates. Buyers have received an average discount of 7% off the asking price during that stretch, which is a bit higher than in the past, when it trended at 4% to 5%.
But that’s not to say investors have turned a blind eye to the market. San Diego enjoys higher yields on average than Southern California’s other coastal markets, and it is cemented as one of the strongest life science markets in the United States.
Alexandria Real Estate Equities has been among the most active investors in San Diego over the past several years. The public real estate investment trust has invested more than $1.3 billion in San Diego since 2018, with $1.2 billion of that spent in Torrey Pines and Sorrento Mesa, California.
The firm’s largest investment during the second quarter was for the five-building Lusk Mira Mesa Business Park in Sorrento Mesa. Alexandria purchased the office and flex campus from John Hancock Real Estate for nearly $300 million and included the opportunity to add 400,000 square feet through redevelopment. That was one of three investments totaling nearly $440 million that Alexandria Real Estate closed during the second quarter.
Although downtown sales are less common than in the life science nodes in North County, the largest sale in the city's central business district in the past decade closed during the second quarter. Regent Properties purchased a four-building portfolio from Emmes Realty Services for $420 million, or about $275 per square foot. The 1.5 million-square-foot portfolio was approximately 70% occupied at the close of escrow, and the acquisition made Regent the second-largest landlord downtown, behind Irvine Co.
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