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DiamondView Deal Caps Downtown Flurry

It was considered a laggard submarket for several years, but rising demand for office space in downtown San Diego has made it a hothouse for some of this year’s biggest commercial property deals.

The latest was the $207 million purchase of the DiamondView office tower in East Village, by San Francisco-headquartered DivcoWest.

The seller of the 15-story tower, built in 2007 at 350 10th Avenue near Petco Park, was a partnership that includes Del Mar-based Cruzan and insurance company Cigna.

The pair acquired the multi-tenant, 305,255-square-foot tower – the only multi-tenant office high-rise in East Village – for $121 million in 2012, from its original developer Cisterra Development of San Diego.

This was the third major downtown tower deal to close in a span of less than two weeks, following the $57.7 million purchase of Five Thirty B on B Street by San Francisco-based Swift Real Estate Partners; and the $109.5 million purchase of the nearby tower at 600 B St. by New York-based Rockwood Capital LLC.

The DiamondView deal is the local region’s biggest office property transaction of 2017, and the second-biggest commercial deal overall, following April’s $232 million purchase of the 533-unit Pacific Ridge Apartments in the Morena neighborhood by San Diego-based American Assets Trust Inc.

Local observers note that downtown during the past few years has gradually recovered from several years of office space exits or downsizings by law firms, financial service providers and other types of companies that in recent years have been migrating operations to places like Carmel Valley and University Towne Center.

One recent result downtown has been rising occupancy and rents, as vacancy rates have dropped. All of these have helped to elevate downtown’s profile as an investment market.

Louay Alsadek, an executive vice president with CBRE Group Inc. who represented the seller in the Five Thirty B deal, said many of downtown’s spaces have recently been filled up by small and mid-sized technology and marketing firms, as well as co-work space providers.

At mid-year, CBRE reported downtown’s overall office vacancy rate at 9.9 percent, which was below the countywide rate of 11 percent. The per-square-foot monthly rent downtown was $2.69 – below the countywide price of $2.84 but representing a narrowing gap in recent quarters.

The recent flurry of downtown sales follow what was a quiet first half of 2017 for the region’s office market. Alsadek said thanks largely to those big deals, San Diego County is in a much better position to at least match the 2016 total of $1.5 billion in completed office deals valued at $10 million and higher.

“It’s going to come close, but will probably come up short from last year’s total,” he said.

Another element favoring landlords, and attracting investors, is a dearth of major new office construction in downtown San Diego. It remains to be seen whether the recent tower deals, combined with accelerated apartment and other commercial development drawing new residents downtown, translates into a new wave of office construction.

The only significant new office construction now underway downtown is a speculative $23 million, 63,584-square-foot building in East Village called Block D, being developed by L2HP as part of the Makers Quarter mixed-use community. That six-story project is the first multi-tenant office project to be built downtown in nearly a decade.

Alsadek said it’s unlikely that a project of that size on its own will make a significant dent in a downtown office market that now spans 12 million square feet.

A typical downtown tower ranges from 20 to 30 stories and contains 300,000 to 400,000 square feet of space. Observers have noted that other office projects in the pipeline downtown – for instance, at the Ballpark Village mixed-use development – are closer in size to Block D than to a high-rise office building.

In its own recent report on downtown’s “Skyline” properties – covering the 20 largest high-rises – brokerage firm JLL noted that San Diego’s skyline vacancy rate at mid-year was 11.2 percent, below the national average of 12.9 percent for major metro central business districts.

The average annual skyline office rent in San Diego was $34.08 per square foot – $2.84 on a monthly basis, which was above the overall downtown San Diego rate of $2.69 reported by CBRE and other brokerage firms.

JLL reported that after four big 2016 downtown tower sales, 65 percent of the local Skyline office buildings have been sold since the current recovery began in 2010.

Noting the pending tower sales that recently closed, JLL said the relative lack of new office product downtown could keep the neighborhood active in months to come.

“Investor activity for San Diego Skyline office buildings remains consistent with nearly 1 million square feet expected to sell in 2017, following 1.2 million square feet trading hands in 2016,” said JLL Managing Director Bob Prendergast.

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