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Industrial Investment in San Diego Reaches 20-Year High

Sorrento Mesa, Otay Mesa Are Primary Targets for Investors

By Joshua Ohl CoStar Analytics January 4, 2022 | 1:44 P.M.

It was a banner year for the industrial capital markets in San Diego in 2021. Investment volume surged to at least a 20-year high, tallying more than $4 billion in transactions, double the next highest year for industrial investment in the region.

Although the amount of for-sale inventory in the San Diego industrial market is still roughly 25% below the level from the end of 2020, quarterly transaction volume reached nearly $1 billion during the third quarter of 2021, setting a record at the time. That was eclipsed though in the fourth quarter, when almost $2 billion in industrial assets traded hands.

The market sales price, which is based on the estimated price movement of every property in the market and informed by actual transactions, rose more than 13% in 2021, while the market capitalization rate fell almost 10 basis points to 5.2%.

Buyers received almost no discount to asking prices in 2021, a figure that historically trends near 5%.

National investors drove activity, accounting for almost $3 billion in transactions in 2021. And while foreign investment fell well below that level, at more than $200 million, it was the highest level of foreign capital placed in the industrial market in San Diego in a decade.

Sorrento Mesa was front and center in the investment market last year as investors continue to be attracted to San Diego’s life sciences nodes. There, investors have the potential to convert older office buildings and outdated industrial facilities into high-end lab space to accommodate the region’s expanding biotech tenants that have shown a willingness to pay top rental rates, exceeding $5 per square foot on a triple-net basis. Sorrento Mesa recorded $1.3 billion in completed transactions in 2021.

The standout deal in San Diego last year closed in the fourth quarter. Vancouver, Canada-based City Office REIT sold a portfolio in Sorrento Mesa for $576 million to a partnership involving Sterling Bay and Harrison Street Capital. The sale was one of the highest-volume commercial deals in San Diego in 20 years. The deal included eight flex and office buildings filled with tech and life sciences firms primarily in the Pacific Corporate Center, along with developable acreage. The buyers intend to build a 1.1 million-square-foot lab campus and renovate existing buildings to include high-end lab space. The total project is estimated to cost $1.6 billion.

Otay Mesa has also risen up the ranks of investor interest, notching more than $400 million in sales last year, while buildings occupied by Amazon continue to fetch high sums.

Firms are increasingly targeting Otay Mesa, given the strength of demand for border-adjacent properties in recent years. LaSalle Investment Management purchased the three-building The Campus for $158.5 million from Murphy Development Group in the fourth quarter. The three buildings were nearly fully occupied at the time of the sale by eight tenants, with Hillebrand leasing the newest of the three buildings which delivered in 2020. The Campus spans more than 650,000 square feet and sits within one mile of the U.S.-Mexico border. It was the highest volume trade in Otay Mesa in more than 20 years.

Four buildings occupied by Amazon sold in 2021, two new facilities in Rancho Bernardo and Otay Mesa and two others where Amazon signed new leases in Kearny Mesa and Chula Vista in 2021. The average capitalization rate was 3.9%, and the four deals totaled $170 million, or $350 per square foot.

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