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Office Investment Remains Lukewarm in San Diego

Lab Conversions Remain a Hot Target However

By Joshua Ohl CoStar Analytics

November 12, 2020 | 2:53 P.M.

As leasing volume across the San Diego office market has cooled to its lowest level in more than 20 years, office investment has followed course. Deal flow has fallen to levels not seen in the region since the Great Recession.

While the fourth quarter so far has shown a modest uptick in volume relative to the third quarter, it’s still on pace to fall far short of the average sales volume in 2018 and 2019, when quarterly sales volume averaged $600 million. So far, the three full quarters amid the pandemic are on pace to just fall short of quarterly averages over the preceding two years.

But even amid the pandemic, much like the area's industrial investment market, investors are increasingly attracted to San Diego's life science nodes, where they have the potential to convert older office buildings into lab space to accommodate the region's expanding biotech tenants.

In July, Alexandria Real Estate Equities purchased the Pointe at Torrey Pines for $97.5 million, or roughly $700 per square foot. The two-building campus had been owned and occupied by National University. It was the first office sale in Torrey Pines in four years. The submarket tends to have a more immobile tenant base since so many of the buildings are owner operated. The buyer is expected to demolish the building and redevelop the site into a life science campus after a short leaseback to National University. The buildings sit on more than 11 acres and were sold for land value. Because it sold for its land value and not the improvements, however, its sale price was removed from office volume totals that quarter.

Sorrento Mesa has accounted for one-third of office investment volume since the second quarter, with a haul north of $150 million across 10 sales so far. The largest of those was for The Foundry in October. The two office buildings total nearly 300,000 square feet and sit on almost 13 acres. Longfellow Real Estate Partners from Boston purchased the property from Shorenstein Properties for $130 million, or more than $460 per square foot. Longfellow targeted the buildings with the intention of converting them into lab space with work finishing up by the end of next year.

That was the third purchase by Longfellow Real Estate Partners in San Diego in 2020 and brings its local holdings to roughly 1 million square feet. Longfellow made its first investment in San Diego in 2018, with the goal of acquiring upwards of 2 million square feet of lab space in the region.

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