High-value office sales creates record high $374 for weighted average price per sq. ft.
San Diego County CA— San Diego continued to demand high price tags across all property types in the second half of 2018. The H2 2018 Trends: San Diego Capital Markets Report tracks property sales activity for the San Diego region and uses cap rate data from the CBRE North American Cap Rate Survey to analyze local cap rates and sales figures by buyer and product type.
In San Diego, H2 2018 sales rebounded substantially after a slow start to the year due to strong sales volumes across the board, most notably for office and industrial product. Total commercial and apartment sales were approximately even with the second half last year, and nearly double H1 2018 totals, with elevated price per sq. ft./unit across most asset types.
Office San Diego office cap rates have settled over the past three years, falling to between 6.25 and 6.75 percent for stabilized properties and to 7.5 to 8 percent for value-add properties. While rents and tenant demand have been high, they have had little impact on cap rates outside of minor shifting in Class B and C and value-add product. On average, there was a 25 basis points (bps) spread between CBD (lower) and suburban (higher) stabilized cap rates.
In the San Diego region, four $100 million-plus office properties
sold in H2 2018 and another just below at $98 million. Weighted average price per sq. ft. reached a record high $374, due in large part to the $715 per sq. ft. price tag on Paseo Del Mar. Institutional buyers resurfaced in H2 2018, with Sorrento Mesa/Valley as the prime target for investments. Private owner/operators consumed the majority of the deals, driven by a highly-active Irvine Company.
“San Diego’s office investment market experienced a significate uptick in sales activity during H2 2018, particularly with high-profile assets in our core suburban submarkets,” said Hunter Rowe, vice president, Capital Markets, CBRE. “The record high price per sq. ft. for H2 2018 was largely driven by six office investment sales over $10 million and over $400/SF. The six assets accounted for approximately 31 percent or $527 million of the overall sales volume during H2 2018.”
A strong industrial leasing market has kept properties as a sought-after asset class in San Diego, keeping cap rates near historic lows. Rents continue to climb amid tightening supply and considerable demand. Though industrial is the most active commercial type for new construction, the 2.6 million sq. ft. currently under development will likely not satisfy the steady demand for certain subtypes like warehouse.
The price per sq. ft. rose slightly in H2 2018, driven by many newly-built and prime R&D properties transacting in the half. R&D/flex properties accounted for 61 percent of industrial transaction volume, including the six largest deals of the half.
“With an approximately 200 million square-foot industrial base, San Diego’s industrial market continues to be in high demand among users and investors alike,” said Ryan Sparks, vice president, Advisory & Transaction Services, CBRE. “The market has experienced several years of consistent rent growth as well as sustained single-digit vacancy rates. Consequently, cap rates in the San Diego industrial market have compressed to near historic lows.”
After two years of steadily rising cap rates, rebounding demand has driven overall stabilized cap rates down by 17 bps. Power centers experienced a sizeable shift in cap rates, falling 42 bps overall and 112 bps for Class B product. San Diego’s Class A power center cap rates were the lowest in the U.S. Neighborhood centers shifted up slightly, due to a 25 bps increase in Class A product.
Transaction volume rebounded after a full year of below-average sales, due in large part to Stockdale’s $175 million acquisition of Horton Plaza and $28.9 million in adjacent properties from Westfield. Private investors, presumably attracted to the steady cash flow and occupancy offered by retail product, were the dominant buyer group in 2018.
“San Diego has had the strongest year-over-year growth of any region and holds a county-wide vacancy rate of less than 5 percent,” said Matt LoPiccolo, first vice president, Capital Markets, CBRE. “Investors continue to view San Diego as a top market due to its strong fundamentals. Arguably the biggest threat to cap rates moving forward is the 30 to 40 percent increase in construction cost that has impacted investor costs in tenant improvement allowance and capital expenditures.”
Multifamily cap rates softened in H2 2018 for both stabilized and value-add assets. Suburban Class A and B product remained especially attractive, due in part to the relatively low supply pipeline for that type of product. Stabilized Class A and B infill product jumped 12 and 38 bps, respectively, due to most new construction competing with those assets.
Investment volumes landed in line with the five-year historic average, driven by the $100 million-plus sales of Alterra & Pravada in La Mesa and the MARC complex in San Marcos. Much like 2017, private buyers dominated multifamily transactions in 2018. Steady cash flow, rising rents and few value-add opportunities make the market a prime target for longer-term owner/operator investors.
“We’ve seen a moderate softening in cap rates as rates ticked up,” said John Newton, Capital Markets, CBRE. “The lack of inventory, a tight rental market and ample liquidity underpin strong demand for multifamily, in particular Class B and C and value-add product. Given strong fundamentals, private buyers see San Diego housing as a stable, long-term investment that is worth a premium over other asset classes.”
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