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Parallel Is Pursuing Office Property Bargains in Secondary Markets

San Diego’s Parallel Capital Partners Inc. has recently picked up some trophy office properties at what it considers bargain prices by historical standards. And it’s had plenty of company in the local market so far in 2014.

Within the past three weeks, privately held Parallel closed on a $73.5 million purchase of the three-building Wateridge Plaza campus in Sorrento Mesa. That was followed by its $101.7 million acquisition of a 20-story waterfront office tower in Long Beach, called Shoreline Square.

The 2-year-old company made more than $400 million in commercial real estate acquisitions during the past year, including large purchases in Dallas and Orange County, adding to existing holdings in Hawaii. It now owns 13 office, industrial, and research and development properties in the San Diego market, with much its local portfolio concentrated in the ever-tightening Sorrento Mesa-Sorrento Valley office submarket.

Parallel Capital Partners, is based in Sorrento Mesa, employs 30 and is led by CEO Matt Root and fellow managing partners Jim Ingebritsen and Jim Reynolds.

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Root said the company prefers “value add” deals, where it can obtain older or otherwise distressed properties that may need renovation or repositioning, but otherwise are selling at far below their replacement cost. The goal then is to fill those properties with tenants as the economy improves and reap returns in the form of rising rental income and property values.

“The search for yield is generating significant activity in real estate,” Root said, adding that investors are also looking to lock in still-low interest rates offered by a variety of lenders, ranging from 3 to 4.5 percent depending on the type of financing.

‘Best First Quarter’ in Five Years

Like other industry players, Root said his company is betting that the local office market is nearly done with its post-recession “recovery from the recovery” and that job growth and other improving fundamentals will help raise demand for office space.

Commercial brokers report that the volume of big-ticket office property sales so far in 2014 points to a local climate that has improved considerably from just a year ago.

In the first quarter, San Diego County saw the completion of five office property deals of at least $10 million, for a total value of $567 million, according to brokerage company CBRE Group Inc.

“It’s the best first quarter we’ve seen in five years,” said Louay Alsadek, an executive vice president in CBRE’s San Diego office who handles investment transactions.

Alsadek noted that 2014’s first-quarter tally is more than quadruple the $131 million in similar-sized deals for all of 2009, and nearly twice that seen during 2010. Based on recent market activity among prospective buyers — including investment trusts, institutional entities, pension funds and high-net-worth individuals — 2014 is well on track to beat 2013’s full-year volume of $1.38 billion for deals with a value of $10 million and higher.

Fundamentals are improving for buyers and sellers, and owners who bought their properties eight to 10 years ago are now finding opportunities to sell at a respectable profit. However, Alsadek said most of the deals completed this year will likely be much smaller than some of the high-profile transactions that closed in the first quarter.

Focus on Prime ‘Secondary’ Markets

Several deals involved properties that were first marketed in late 2013. Those included Kilroy Realty Corp.’s sell-off of 13 San Diego office properties for a total of about $327 million, most of which were acquired by Connecticut-based Starwood Capital Group; and the recent $154.9 million purchase of two downtown San Diego office towers by New York-based Emmes Asset Management Company LLC.

With many of the trophy office assets picked over in the nation’s “gateway” real estate markets — such as Los Angeles, San Francisco, Chicago, New York and Washington, D.C. — Root said Parallel Capital’s focus in coming months will continue to be on prime “secondary” markets. Those include San Diego County, Phoenix, Dallas, Denver and Seattle.

Root said Parallel Capital beat out at least a dozen other investors looking to buy the Long Beach tower. In the Sorrento Mesa deal, it partnered with Chicago-based Equity Group Investments, led by billionaire entrepreneur Sam Zell, and obtained Wateridge Plaza at a price well below the $98 million that GE Pension Fund paid for it in 2007.

“We were able to partner on that because Equity’s investment focus is similar to ours,” Root said.

In Sorrento Mesa, he said the company sees opportunities to attract office tenants who are otherwise being shut out — because of pricing or availability — in markets such as Del Mar Heights and Carmel Valley.

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