San Diego-based BCL Inc. went shopping for office buildings and found two local properties matching its sweet-spot criteria in the final months of 2012. It purchased Regents Park Financial Centre at University Towne Center for $28.9 million, just weeks after partnering with a Boston firm to buy One Pacific Heights at Sorrento Mesa for $34.1 million.
BCL President Casey Brown said the company spent $70 million on acquisitions in the past year, as it focused mainly on older buildings — 1980s and 1990s vintage — located in high-demand submarkets and otherwise near full occupancy. That topped 2011, when the company bought downtown’s Bank of America tower for $60 million — and the company expects to go even higher in 2013.
“We’re projecting about $100 million in new acquisitions this year,” Brown said, noting BCL also plans around $1 million in energy-efficiency and other upgrades at its newly acquired buildings.
Investment and brokerage experts say 2013 will likely see an increase in investment activity for the region’s established commercial real estate property inventory in the office, industrial and apartment markets. That’s largely because new product remains slow to arrive, and investors see continued vacancy drops and rent increases adding up to rising demand for existing properties.
“There’s going to be more competition for some of those assets,” said Michael Roberts, a San Diego-based director in the Southern California capital markets practice of Cushman & Wakefield.
Roberts noted that the San Diego County office market has now seen eight consecutive quarters of positive absorption — more space being occupied than vacated — and the region has led Southern California counties for absorption in 12 consecutive quarters. The region’s direct office vacancy rate — not counting subleasable space — was 12.6 percent at the end of 2012, down from 14.2 percent a year earlier.
Strong Tenant Demand
“In terms of investment transaction volume, it’s not nearly back to where it was in 2006-2007,” Roberts said. “That said, we are seeing a recovery taking place in the market.”
Experts said investor demand for local commercial real estate is being fueled by high barriers to new construction, combined with a diverse economy that is keeping tenant demand strong across sectors such as government, tourism, education and technology.
Barry Saywitz, president of brokerage and investment consulting firm The Saywitz Co., said commercial property investment continues to be spurred locally by still low interest rates, and ample sources of debt and equity financing available on the market from numerous players looking to take investment money off the sidelines, including insurance firms, pension funds and real estate investment trusts.
“As long as you have dropping vacancies, rising rents, and lots of money chasing investments, you will see properties selling very quickly and at higher prices,” said Saywitz, whose company has a San Diego regional office.
The brokerage firm Colliers International noted that the region’s industrial/research and development property market saw its sixth straight quarter of positive demand, with more than 1 million square feet of net absorption in the fourth quarter of 2012. The region’s overall vacancy rate went to 9.9 percent — the first time it has been below 10 percent since early 2009 — and the year’s 3 million square feet of net absorption marked the strongest demand since the 3.4 million square feet recorded in 2005.
Linda Greenberg, senior vice president in Colliers’ San Diego office, said the past year saw an overall increase in industrial property purchase volume, led by large transactions including the $152 million acquisition of San Diego Tech Center in Sorrento Mesa by Beacon Capital Partners, and the sell-off by the Collins family of four local industrial parks to several buyers, for a total of $159 million.
Apartment Inventory Lags Demand
In the coming year, Greenberg said she anticipates more small business owners making industrial acquisitions as owner-users, aided in part by offerings from the Small Business Administration. But they will be carefully gauging factors including the maturity of their business and the sector they’re involved in, as well as the potential local impact if there are federal cuts to the military and other government sectors.
“Some of these companies are going to be careful about long-term lease extensions,” Greenberg said.
In the multifamily sector, the local region saw apartment property transaction volume rise about 13 percent in 2012 from the prior year, said Darcy Miramontes, executive vice president in the San Diego office of Jones Lang LaSalle.
While 2013 is expected to be the first year of a likely four-year rise in the region’s apartment supply — with the addition of 1,500 to 2,200 units annually in that timeframe — the existing inventory this year will continue to lag rising demand by renters.
That means a continuing tightening of the local apartment vacancy rate — already among the tightest in the nation at around 5 percent, with rates of 2 to 3 percent in high-demand submarkets such as Carmel Valley, Del Mar and Pacific Beach. With that tightening comes rising rents, which attracts multiple buyers when apartment properties hit the market.
“New properties are hard to come by, so the investors are going to go for older assets — sometimes older Class B properties,” Miramontes said.
Chris Pascale, a senior vice president in CBRE’s San Diego office, said office transaction volume patterns seen in 2012 are likely to continue in 2013 and well into 2014, aided by a low-interest financing and debt environment that is driving bidders to Class A and B properties, in urban and suburban submarkets.
The local region in 2012 saw just under $700 million in office property transactions of at least $10 million. While the total was lower than the prior year, the price paid per square foot on 2012 deals rose 15 percent.
Based on what’s currently on the market locally, and if those properties sell at their expected asking price, Pascale said the first half of 2013 alone could see around $680 million in office property transactions. That would put the full 2013 on track for around $1.2 billion in sales for the year, which would be on par with normal pre-recession transaction years, such as 2003 and 2004.
“It’s a lot of investment money chasing a limited amount of good properties,” Pascale said. “A lot of those investors will end up going into different niches.”