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Office, industrial demand remains strong; supply weak

During the past 18 months, downtown San Diego has seen the sale of nearly every major office building downtown, and industrial projects have been in heavy demand by investors.

With low vacancy rates and rents in most areas staying remarkably strong right through the economic slowdown, San Diego's office buildings -- particularly those downtown -- have been in high demand.

"This is probably one of the most remarkable years for San Diego ever in terms of investment," said Bret Gossett, a CB Richard Ellis senior vice president specializing in office investment properties.

Gossett said after the Sept. 11, 2001, terrorist attacks, institutional capital steered away from the stock market. Those investors soon discovered that San Diego's office market was one of the strongest in the country.

Gossett said San Diego is so strong due to a lack of entitled land, rental rates on the increase, and the fact that once vacant buildings are being filled again. A case in point is the five-building Kilroy Centre Del Mar in the Carmel Valley area, which returned four-fifths of its more than 500,000 square feet when Peregrine Systems bailed out of most of its space two years ago. Now fully leased, Gossett says the rent for that space has climbed by 30 percent in less than two years time to $3.55 per square foot, which is some of the most expensive office space in the county.

Meanwhile, office projects generally sell quickly when they do come on the market -- some of which have been very big.

Triple Net Properties of Santa Ana scored a triple play with its acquisition of the Emerald Plaza, 525 B St. (Golden Eagle Plaza), and 600 B St. (Comerica Bank building) in June.

In what was believed to be the highest priced office property sale ever in the region, the three high-rises totaling 1.16 million square feet were sold for $274.5 million. The properties were acquired from Southwest Value Partners of San Diego.

Triple Net manages a portfolio of more than 19 million square feet of commercial properties with a market value of more than $2.5 billion.

Triple Net's acquisitions were just the latest in a total of more than $1 billion worth in downtown office sales in 18 months that also included One America Plaza, Symphony Towers, the First National Bank Building, the 101 W. Broadway building, the Chamber building and the recently refurbished Washington Mutual Building, among numerous others.

Up until the Triple Net acquisition, One America had fetched the highest price of any downtown office building, selling for about $293 a square foot, or for $166.2 million a little more than a year ago.

On July 2 The Shidler Group, in partnership with Angelo, Gordon & Co., announced that it has sold Seaview Corporate Center in Sorrento Mesa for $92,135,000. The 353,067-square-foot, four-building office and biotechnology complex is located at 10180-10196 Telesis Court.

The Shidler Group purchased the property in April 2002 for $62.5 million -- an indication as to just how high prices have been rising.

The center includes three institutional-quality, Class A office buildings totaling 340,287 square feet and one 12,780-square-foot, fully equipped biotechnology building.

The buyer was Principal Real Estate Investors. Prior to Seaview, the last of the big office project sale in the suburban office market was in 2002 when Glenborough Realty Trust Inc. bought the office portion of the mixed-use Aventine complex in North University City for approximately $75 million. The Aventine property -- not including the Hyatt hotel -- included 217,000 square feet of Class A office space, 23,000 square feet of restaurants and a 1,181-space underground parking garage.

In December of last year, Glenborough paid approximately $32.5 million, or $187 per square foot to acquire the 19-story, approximately 174,000-square-foot 610 W. Ash office building in downtown San Diego.

Recent sales of well-located industrial properties are in high demand. Here too, a shortage of industrial buildings and land puts vacancy levels in the single digits in most areas, and everything is getting more expensive.

"Anything in Southern California is a prime investment target. The problem with San Diego is we don't have a lot of industrial product," said Lynn LaChapelle, a Burnham Real Estate Services senior vice president. In June, a Sares Regis Group entity on behalf of J.P. Morgan Investment Management, paid $41 million for the five building, 493,898-square-foot North County Corporate Center on Joshua Way and Progress Street in Vista.

Also in June, two properties with three office/research and development buildings totaling 177,135 square feet in Sorrento Mesa at 6262 Lusk Blvd. and 6160-6170 Cornerstone Court East, were sold for $27,375,000.

The buyer is affiliated with Layton-Belling Associates (LBA) of Newport Beach.

The seller of the properties was W9/PC Limited Partnership, a joint venture between WCB Properties and Goldman Sachs' Whitehall Funds.

Single industrial buildings, because of their lack of availability and single-digit vacancies, can command high prices as well.

A case in point was the June sale of Parkway Centre One, a 126,720-square-foot research and development/light manufacturing building at 14100 Danielson St. in Poway for $16.25 million. The buyers were Crest Partners-Poway One Danielson LLC (68 percent), Gatley Properties LLC (22 percent) and RGE Investments LLC (10 percent).

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