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San Diego office market a tempting target for out-of-town investors, money

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San Diego is currently in its best commercial real estate market ever, according to Mark Read, senior managing director of CB Richard Ellis.

Read made his comments during a RealShare San Diego real estate conference at the Estancia Hotel Thursday. The program was produced by Real Estate Media.

Stephen Corea, senior vice president of acquisitions for Santa Ana-based Triple Net Properties LLC, said San Diego should continue to be in great demand by investors around the country and beyond.

Corea should know. Last year, Triple Net paid $274.5 million to acquire three downtown San Diego office towers: the 30-story, 356,901-square-foot Emerald Plaza office building (minus the Wyndham Hotel); the 24-story, 336,049-square-foot Comerica Bank Building at 600 B St.; and the 22-story, 427,988-square-foot Golden Eagle Plaza at 525 B St.

There have been no shortage of lenders willing to pour capital into acquisitions such as these, notwithstanding concerns about the ability to charge rents more than $3 a square foot.

Tony Thompson, Triple Net CEO, said it is now time for office rents to climb.

"We have some of the lowest office rents in the world," Thompson said.

Rising rents will be needed to keep the investors coming, and come they have. The funding sources include pension funds, real estate investment trusts and traditional financial services firms.

San Diego continues to draw investors paying top dollar for Class A office buildings such as Emerald Plaza and Wells Fargo Plaza, purchased by The Irvine Co. for $148.27 million in November 2004. The Irvine Co. has since also acquired the SBC Building at 101 West Broadway and the NBC Building at 225 Broadway. The Irvine Co. also acquired the 570,383-square-foot Symphony Towers in March 2003 for $134.25 million.

Louay Alsadek, a Grubb & Ellis|BRE Commercial office and industrial sales specialist, said that recent office sales have been higher than the $300 per square foot range, and that 11 downtown Class A office buildings have changed hands, some more than once, since 2002.

The prices for these buildings already were approaching replacement costs; however, with construction and material fees soaring they may be an even better deal today.

Lars Platt, a Cushman & Wakefield director involved in the $167 million sale of the First National Bank building to the Paramount Group, recalls that in 1991, in the middle of the recession, office buildings were selling for as little as $100 per square foot downtown.

"Southwest Value Partners bought here and brought its buildings up to Class A status," Platt said.

Emerald Plaza was already at that level, but Golden Eagle Plaza and later the Comerica Bank Building needed upgrades.

Craig Davey of the San Francisco-based Rreef Funds, which has invested in a wide range of projects here such as Bernardo Gateway and Olympia Plaza in Murphy Canyon, said his firm has invested in 50 markets around the country, and San Diego is among the most active.

"Every time we have a property in San Diego we get inundated with calls," Davey said. "The key element for investors is scarcity, and you have scarcity here that you don't have in other markets. Not many CBDs (commercial business districts) can say (except for Lankford & Associates' Broadway 655) that they haven't put up a major office building in 14 years."

Although rising rents will help landlords, Davey concedes he is very nervous about how higher interest rates and a two- to three-year backlog of money coming in might affect pricing on existing structures.

"We're starting to bump up against replacement cost," he said.

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