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Tuesday, Mar 19, 2024
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Del Mar Deal Adds to Co.’s Prime Properties

Kilroy Realty Corp. recently raised more than $260 million in a secondary public stock offering, and San Diego County ranks high on the list of places where it is looking to bolster a West Coast commercial portfolio that tops $4.7 billion.

Los Angeles-based Kilroy (NYSE: KRC) was already San Diego’s second-largest office landlord, with more than 5 million square feet in the market countywide, when it announced the $126.3 million purchase of The Heights at Del Mar, a two-building campus in the high-demand Del Mar Heights submarket with an entitled 4.2-acre parcel of land for future development.

Kilroy’s acquisition of the property from Prudential Real Estate was the local region’s third-largest commercial real estate deal of 2013, noted brokers at Cassidy Turley, which represented the buyer and seller.

It was also the largest sale since 2007 in the office submarket that straddles San Diego’s Del Mar Heights and Carmel Valley neighborhoods, off Interstate 5 near the city’s northwest border with Del Mar.

Steve Scott, senior vice president in Kilroy’s San Diego office, said its latest acquisition was also its biggest in several years in the local market, and it is fielding queries from potential tenants who might occupy a future third building at The Heights.

“We’re seeing interest from companies across several industries,” Scott said.

To Build or Not to Build?

As with most of its local holdings — including 40 existing properties and seven sites with development in the pipeline — Scott said the real estate investment trust is carefully gauging the economic recovery before proceeding with new construction.

While current signs are encouraging, he said the company is watching factors including the pace of job growth, interest rates and how local firms decide to configure their real estate footprints. New construction remains rare throughout San Diego County, partly because companies continue to do more with less space per employee, and several submarkets have plenty of unoccupied office space.

Del Mar Heights’ total office inventory is around 4.3 million square feet, less than half that of neighborhoods like downtown and Kearny Mesa. Experts note that the submarket’s location — close to the region’s big technology hubs — puts it in high demand within several industries, especially among companies seeking large blocks of space in newer Class A properties, which have recently been dwindling.

Brokerage services company Cushman & Wakefield noted that Del Mar Heights’ Class A average office rent in the second quarter was $3.65 per square foot, and its overall average rent was $3.41. Both were well above countywide averages — $2.57 for Class A and $2.16 for all office buildings.

Del Mar Heights’ Class A office vacancy rate, with sublettable spaces included, was 12.7 percent, below the county’s 13.6 percent for Class A. Its overall vacancy, however, was on par with the county average, at 14.3 percent.

Del Mar Heights continues to attract high-tech and life-science tenants, along with the financial services firms that have long flocked there, said Rick Reeder, senior managing director at Cassidy Turley who handled the recent Kilroy deal with fellow broker Brad Tecca.

Staying Close to Clients

Many of its recent arrivals are relocated support businesses serving the growing technology sectors, such as accounting and intellectual-property law firms looking to be closer to their clients.

“Many times you have the executives of these companies wanting to locate near their own homes, in places like Del Mar and Carmel Valley, and they want to cut down on commuting times for themselves and their workers,” Reeder said.

The tenant mix at The Heights at Del Mar is typical of the neighborhood’s business diversity, and the acquisition will help Kilroy compete in a climate where landlords are offering highly amenitized campuses to attract and retain tenants, Scott said.

The Heights is anchored by Neurocrine Biosciences Inc. (Nasdaq: NBIX) and the law firm Knobbe Martens Olson & Bear LLP, with other tenants including Allen Group Architects and Southwest Value Partners. The 13.8-acre campus also includes a fitness center, outdoor basketball court, walking trails and a 600-seat outdoor amphitheater.

The property also shares a border with Kilroy’s proposed $650 million, mixed-use, main street-style development in Carmel Valley. Known as One Paseo, that multiphase project would include more than 470,000 square feet of office space, 600 residential units and 198,000 square feet of shops and restaurants, with public plazas.

One Paseo has been revised several times over the past five years and is before the Carmel Valley community planning board, as Kilroy works with the city to assuage concerns over traffic and related issues. Scott said Kilroy is optimistic about garnering city approvals by mid-2014 and starting construction in late 2014.

Kilroy is the largest office landlord in Del Mar Heights and Carmel Valley, and it has significant holdings in University Towne Center, Sorrento Mesa and the Interstate 15 corridor, with additional properties in Mission Valley and Point Loma.

Among other projects in the works, Kilroy is in talks with various tenants as it looks to move ahead with development of new phases at its Santa Fe Summit off state Route 56 in Carmel Valley, where Scott said 600,000 square feet of new office space could be added within the next few years.

Kilroy has been in business for 65 years, currently focused primarily on Southern California, the San Francisco Bay Area and the Seattle region.

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