San Diego Business Journal

Del Mar Deal Adds to Co.’s Prime Properties

PROPERTY: Kilroy Grows, 2nd Largest Office Landlord By Lou Hirsh Monday, September 30, 2013

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.

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