Executive Summary
- Q1 office sales fall 42% year-over-year
- Average price per square foot drops 5% from previous quarter
- Top quarter sales are portfolio deals
- 4 major office projects due for delivery in Q2
At the end of 2017’s first quarter, the San Diego office market lagged behind the Bay Area’s soaring numbers and was followed closely by Orange County’s modest growth.
Encompassing a total completed inventory of roughly 75 million square feet of office space in buildings of over 50,000 square feet, the San Diego market counts as one of the smaller U.S. office markets and is prone to significant swings in transaction activity. In terms of dollar volume, the quarter closed at 31% below the past four-year San Diego quarterly average. However, with over $300 million worth of office assets traded during the first three months of the year and several pre-leased projects slated to come online in the following months, the market is not losing its appeal.
Total square footage traded during 2017’s first quarter sits just 8% below last year’s average volume of 1.3 million square feet. Though 5% below 2016 fourth quarter numbers, the average price per square foot holds well above the $200 mark.
With the help of Yardi Matrix data, we analyzed all sales of office buildings larger than 50,000 square feet to close at over $5 million during the first three months of 2017 (see methodology below for further details). In addition, we looked at major upcoming office projects that are scheduled for delivery in the following quarter.
Q1 Dollar Volume Holds Above $300M
This year’s San Diego office sales kicked off with six major transactions. The office assets traded amassed close to $303 million, marking a 42% year-over-year drop in dollar volume from the $518 million recorded in Q1 2016 and a 45% decrease from the $553 million recorded at the close of 2016’s fourth quarter.
While these percentages seem dire, the San Diego office market is not as volatile as it looks–given its relatively smaller market size, transaction activity is sensitive to the occasional super-deal. The best example of that is 2013’s third quarter, when the market recorded its highest quarterly dollar volume of the past four years – nearly $743 million. During that quarter, PGIM Real Estate purchased four Sorrento Valley office buildings for $405 million, as part of a seven-building portfolio deal. This transaction alone accounted for over half of the quarter’s record total dollar volume.
A little over 1.2 million square feet of office space traded during the first three months of 2017, falling 19% from the 1.52 million-square-foot sales volume recorded during last year’s first quarter.
Average Price per Square Foot Dips 5%
The San Diego office market‘s strongest quarter of the past four years in terms of price per square foot was Q3 2013, when the average peaked at $356. The second-highest average price per square foot was $322, recorded during last year’s second quarter. Excluding ground lease sales, ownership stake deals, controlling interest and portfolio transactions, this year’s first quarter average price per square foot settled at $222, which is not far behind the past four years’ quarterly average of $234.
Although 14% below last year’s average of $259, and 5% down from the previous quarter, Q1 2017 has been the fifth quarter in a row when prices have consistently held well above $200 per square foot.
Portfolio Deals Top Transactions in Q1
The top two spots in our list of major transactions of the quarter were taken up by portfolio deals. In January, HFF brokered the sale of Blackstone Group’s Governor Park Plaza and the Governor Executive Centre buildings. Regents of the University of California paid $83.5 million for the portfolio, which, according to CPE, was 91% leased at the time.
The package deal that landed at number two is a three-building portfolio purchased by the Casey Brown Co. for just under $77 million. Totaling 332,000 square feet, the portfolio includes the Valley Corporate Center, the Chesapeake Park Plaza and Old Town Plaza.
Number three on our list is the biggest single asset to trade hands during the first quarter – the 350,000-square-foot 101 Ash Street building, purchased for $72.4 million by a joint venture between Shapery Enterprises and Cisterra Development, with the latter holding majority interest.
Projects in Line for Q2 Delivery
With the completion of the Rancho Bernardo Medical Center, 100,000 new square feet of office space were added to the San Diego market in February. The Lankford & Associates development opened one month ahead of schedule and is the new home of Rancho Bernardo long-time medical services provider Sharp Rees-Stealy.
Of the four new office projects larger than 50,000 square feet that are slated for completion during the second quarter of this year, the largest one is BioMed Realty’s i3. The 307,659-square-foot Class A flex office and R&D campus is currently under construction at 4775 Executive Drive, near the I-805. San Diego-based biotechnology company Illumina will begin its 10-year lease of the Innovation campus in July.
i3 campus (rendering, Bio Med Realty)
The second-largest project is Irvine Co.’s Eastgate Terrace, due for completion in mid-2017. Also located near Interstate 805, the development will bring 96,400 square feet of Class A office space to the market, featuring highly-efficient 32,000-square-foot floor plates and contemporary indoor/outdoor workspace.
Methodology
- Square footage parameters – over 50,000 square feet;
- Minimum amount per transaction – $5,000,000;
- Transactions recorded until April 12th, 2017;
- Some sale prices were calculated based on a ‘tax-transfer’ formula;
- We excluded ground lease, ownership stake, controlling interest and portfolio deals from our calculation of the average price per square foot;
- Data source: Yardi Matrix.
