SAN DIEGO – A handful of recent San Diego office sales ran counter to ongoing reports that there is little interest among investors in buying office property.
Key among them was HP Investor’s $20.25 million acquisition of a seven-story Mission Valley office building at 1450 Frazee Road in partnership with Realm, L.P.; the $8.8 million sale of Bernardo Regency Centre by Omninet Capital to Providence Real Estate Group; and the $23 million sale of a pair of Carlsbad office buildings to Strauss Investments.
“The asset class has fallen so out of favor with capital investors, there are just these opportunities to buy things on the cheap,” said Sumeet Parekh, managing partner of HP Investors, based in Solana Beach.
“Even though office has a lot of headwinds and distress ahead of it, sometimes good assets are included in those being thrown out,” Parekh said, adding that it would cost far more to construct a new building like 1450 Frazee Road.
“It’s quite possible that the land value is quite close to what we paid for the building,” Parekh said. “The building was well maintained. It always was, and it is a great building in terms of the condition and the way it was operated.”
HP Investors isn’t planning any major renovations, aside from redoing the lobby and parking lot and upgrading security, Parekh said, adding that HP Investors will likely spend “north of $5 million” on improvements.
“We’re in the process of evaluating and pricing out things,” Parekh said.
Rebranded as Axis 1450, Parekh said that the 145,000-square-foot building is in a prime location to benefit from an ongoing effort by companies to bring employees back to the office.
“The going-to-work trend is coming back. I don’t think it’s going to go back to the way it was pre-pandemic, but it’s definitely going to be less remote (work),” Parekh said. “The trend of going back to the office is quite prevalent in neighborhoods like Mission Valley.”
Parekh said that he expects the overall market for office buildings to struggle, but that HP Investors would look at other buildings similar to Axis, “well located with good submarket fundamentals.”
“If the right building comes up, we’ll certainly take a look at it,” Parekh said.
Bess Wakeman, an executive vice president of JLL who brokered the sale to HP investors with JLL Senor Managing Director Tim Olson, said that Mission Vally office property benefits from its central location as employees return to the office.
“It’s choppy waters out there, from submarket to submarket and from building to building, but Mission Valley is uniquely poised right now,” Wakeman said. “As we’re seeing companies return to the office and figure out their long-term real estate needs, it seems like they’re really trying to get closer to where their employees are living, and we’ve seen a big influx of people coming to Mission Valley.
Compared to other cites, Wakeman said that, “San Diego is still very strong.”
“Deals are definitely getting done,” Wakeman said. “We haven’t had as many highs or lows as some other markets have had, but there’s always room for improvement.”
Sub-Markets Differ in Resiliency
With 48,027 square feet of office space in three-buildings, the sale of Bernardo Regency Centre at 11545 West Bernardo Court is indicative of what CBRE Executive Vice President Matt Pourcho said has been an active office market in suburban areas.
Wakeman of JLL said that one thing that downtown has going for it is that, “There’s so many champions that want to see downtown be successful,” citing the Prebys Foundation’s April purchase of Wells Fargo Plaza for $40 million as an example.
“There still are quite a few businesses downtown that like downtown,” Wakeman said. “Each submarket has its unique reasons why tenants want to go there. That’s one of the reasons why San Diego has looked good compared to other submarkets across the country, because it is a pretty diverse area.”
Pourcho said that the I-15 corridor, including Rancho Bernardo, has been especially resilient, with its cluster of defense contractors.
Most of the office space along the corridor is leased, Pourcho said, adding that, “The suburbs are extremely healthy.”
‘Right Story’ Overcomes Challenges
In Carlsbad, the $23 million acquisition of the office buildings at 1902 and 1903 Wright Place was financed with an $11 million loan from Gantry, a real estate financing company with offices in Newport Beach.
Gantry Principal Andy Bratt said that the property was attractive because it was 92% occupied in what has remained a favorable market.
“It’s a Class A building. It’s in a good location,” Bratt said. “There is no question that office continues to be the most challenging asset class to finance post-pandemic. However, the office market continues to evolve. Gantry is successfully underwriting office loan requests through its extensive network of life insurance companies.”
Like Parekh, Bratt said that the general malaise of the office market “is creating an opportunity” to buy property at a good price.
“You just have to have the right story,” Bratt said.
HP Investors
FOUNDED: 2010
HEADQUARTERS: Solana Beach
MANAGING PARTNER: Sumeet Parekh
BUSINESS: real estate investment
EMPLOYEES: 20
WEBSITE: www.hpinvestors.com
CONTACT: 858-271-6701; info@hpinvestors.com
NOTABLE: HP Investors has a real estate portfolio valued at about $1 billion