The latest office acquisition of Alliance Diversified Holdings LLC is not hard to find on a stretch of Miramar Road long dominated by furniture stores and strip retail centers.
“People joke to me that they don’t even have to Google it,” said Ted Eldredge, president of the San Diego-based private equity firm. “They just head down Miramar and look for the one building on that street that looks like a pyramid.”
The 22-year-old “pyramid building” stood out when it first opened, and it remains an anomaly of sorts in the Miramar commercial real estate submarket, known much more for its industrial warehouses and furniture showrooms than for its office buildings during the past several decades.
Miramar has just 1 million square feet of office inventory, compared with about 14 million square feet of industrial space, local brokers note. While the central San Diego neighborhood has ebbed and flowed over the years with shoppers seeking home-furnishing bargains — and more recently a raft of craft beer brewers expanding their manufacturing and distribution operations — it hasn’t been first on the minds of those seeking office space.
“Miramar is almost always on the same list as Kearny Mesa for the industrial tenants looking for space,” said Evan McDonald, a vice president in the San Diego office of Colliers International. “It’s just not known right now as an office market.”
Alliance Diversified is betting on changing that mindset. It recently paid $13.6 million for the mostly vacant pyramid-shaped property at 7310 Miramar Road, and it’s planning millions more in renovations as it renames and repositions the building as the San Diego Innovation Center, with upgrades to suites on all six floors.
The aim is to attract technology, health care and other types of office tenants that are now most likely to choose neighboring submarkets to set up shop, such as Sorrento Mesa, Kearny Mesa and University Towne Center.
Area Attracting Startups
Alliance Diversified and its leasing brokers, at Voit Real Estate Services, said their optimism is fueled in part by a slew of recent high-profile deals and move-ins impacting the Miramar neighborhood. The submarket is bounded roughly by I-805 to the west, I-15 to the east, Miramar Road to the south and Trade Street to the north.
The market has no significant new construction underway, and most of the commercial properties there were built in the early to mid-1980s. The neighborhood has benefitted in part from growing tenants seeking space after being either crowded out or unable to enter busy nearby industrial hubs like Sorrento Mesa and Kearny Mesa.
Miramar in 2013 was second only to Sorrento Mesa among San Diego County submarkets for the square footage of its industrial leasing deals — more than 985,000 square feet, according to brokerage company Cassidy Turley. But the number of Miramar lease deals during the year, at 118, was well ahead of any other industrial neighborhood — and more than twice Sorrento Mesa’s 54.
Many of those Miramar leases were signed by smaller companies in multitenant “incubator” buildings, housing startup and early-stage companies in sectors like manufacturing, technology, health care and construction.
“These smaller companies in the multitenant incubators are what San Diego is all about,” said Bryce Aberg, managing director in Cassidy Turley’s San Diego office. “When these smaller companies are expanding, that’s a sign that the overall economy is getting better.”
Aberg said there is room for more firms in Miramar, with year-to-date industrial vacancy now at 6.1 percent — below the countywide average, but not as tight as the nearby Kearny Mesa, where vacancy is 4.8 percent.
“You have vacancy in Miramar now at pre-recession levels, but rents have not yet returned to the pre-recession highs,” said Aberg, noting that the submarket’s industrial rents are still 15 to 20 percent below pre-recession peaks.
McDonald at Colliers International noted that companies tied to growing industries, such as defense and construction, are contributing to steady gains in Miramar’s tenant base. One of the neighborhood’s biggest lease deals of the past year involved San Diego Composites, which makes aerospace materials and related structures, taking more than 69,000 square feet at Activity Distribution Center.
That 252,000-square-foot industrial park, on Activity Road, was also involved in one of the region’s largest industrial property purchases of 2013; KTR Capital Partners bought it for more than $32.4 million.
In other Miramar parks, McDonald has seen several smaller companies tied to the residential construction industry set up shop recently, including one that produces automatic garage doors and others that supply the residential building and home improvement industry with materials and services.
Upgrades Target Long-Term Tenants
Alliance Diversified is confident, Eldredge said, that generally lower lease costs than those in neighboring markets can lure tenants to its pyramid building, combined with the property’s 200-space underground parking structure and its equidistant access to nearby Interstates 15 and 805.
The owners are also counting on building amenities, sought after in the current office market, which turned out to be ahead of their time when the pyramid building debuted in 1992. They include open floor plans and wide swaths of glass exposure created by the unusual slanted shape, originally designed by San Diego architect N. Charles Slert.
Still to come, Eldredge said, are wireless and meeting-space upgrades that will be needed to attract and keep tenants long term. Plans call for the ground floor, which long housed furniture stores, to eventually be filled with tenants that would serve businesses in the pyramid structure and nearby businesses, including a restaurant and a possible fitness center.
Already, the new owner has attracted a mobile phone applications company — yet to be named at press time — to occupy one of the suites and has received queries and offers from several other prospective occupants.
Among Alliance’s hopes is that the ground floor might be occupied by a brewpub restaurant or beer garden operated by one of several craft beer companies now in Miramar, or perhaps a new industry player drawn to the neighborhood.
“I think we’re going to be able to attract a good variety of tenants,” Eldredge said.
Craft Beer Runneth Over
The new owner of the pyramid building, and its leasing brokers, are aiming to capitalize on continuing economic momentum being generated within Miramar by the craft beer industry, which could help attract brewpubs, restaurants and other amenities to make the neighborhood more attractive to office tenants.
Not far from the pyramid building, on Carroll Way, locally based Ballast Point Brewing & Spirits last year signed one of the biggest Miramar industrial leases of the past decade — a $16 million, 180-month deal with building owner H.G. Fenton Co. to occupy more than 106,000 square feet.
Ballast Point is renovating the site for what will be its fourth and largest location in San Diego, housing its main brewing facilities by midyear. The location will also have 36,000 square feet of office and retail operations — including a tasting room and restaurant — slated to open in late 2014.
Miramar is already home to White Labs, a supplier of beer yeast and industry-crucial brew-testing services, and several growing craft beer makers, such as AleSmith Brewing Co. and Hess Brewing.
After making the proper renovations, operators of the pyramid building should be able to compete favorably with nearby office markets, partly by offering lower rents, said Brandon Keith, senior vice president in Voit Real Estate Services’ San Diego office.
He estimated that a rent of about $1.50 per square foot should be viable at the pyramid building — less than the $1.75 now typically seen at Kearny Mesa, the $1.85 seen in Sorrento Mesa and the $3 seen in UTC.
Based on queries and offers that building operators have received in recent weeks, Keith said Voit is projecting that the pyramid property will be 50 percent leased by summer and fully leased within 18 months.
Whether a craft beer brewer comes into the pyramid building, or the nearby brewery scene attracts other tenants to the site, Keith said the rise of the beer industry is a sign that the neighborhood is poised to diversify beyond the economically sensitive home furnishings industry that has long defined the Miramar Road commercial corridor.
“We’re trying to get away from that because that category doesn’t really serve the other businesses in that vicinity,” Keith said. “We’re looking for things that will bring more synergy for these other tenants.”