San Diego Apartment Sale Among Region’s Largest of Past Year

San Diego Apartment Sale Among Region’s Largest of Past Year

Property Trades for $125.5 Million Amid Slowdown in Deal Activity

Los Angeles-based investment firm Decron Properties acquired a 240-unit apartment complex in San Diego's Mission Valley neighborhood. (Decron Properties)

By Lou Hirsh
CoStar News

December 12, 2023 | 4:23 P.M.

A $125.5 million San Diego apartment sale is among the region’s largest of the past year by total price, though big deals remain rare with elevated interest rates.

Los Angeles-based investment firm Decron Properties said it bought the 240-unit Margo at The Society, built in 2021 at 201 Del Sol Drive in San Diego’s Mission Valley neighborhood. The seller was a private San Diego investor.

Decron officials said the acquisition was part of a 1031 exchange in which Decron sold two apartment properties in Thousand Oaks, California, near Los Angeles. IRS tax codes allow investors to swap one or more investment properties for another and defer capital gains taxes under certain conditions.

A Decron statement said the company has several other dispositions scheduled to close in the next few weeks, as it looks to make its California portfolio “younger and geographically more diverse while reducing the firm’s exposure to assets that are restricted by city or statewide rent control.”

The company said Margo at The Society is part of a San Diego mixed-use development that includes four multifamily complexes surrounded by a variety of hotel, retail, restaurant, transit and entertainment options, all within walking distance of the acquired property. Those include the 1.7 million-square-foot Fashion Valley Mall and several stops of the light-rail San Diego Trolley.

Decron officials said the company is looking to acquire 500 to 1,000 more apartment units in San Diego County over the course of the next 24 months.

“Unlike most markets in California, San Diego continues to experience remarkable growth, powered by a surging presence from the tech, healthcare and biotech industries establishing a growing presence in the area,” Decron CEO David Nagel said in the statement regarding the purchase of Margo at The Society. “The property’s stellar location, combined with the ongoing need for high-quality, multifamily assets to meet the demand of a growing population, made this an ideal opportunity for Decron.”

Mission Valley, in the geographic center of San Diego, is among the region’s most trafficked neighborhoods with several freeways and public transit routes passing through it. It also has among the region’s largest concentrations of retail centers, and during the past decade has been among its most active for development of apartments and single-family housing.

Construction and deal volume across the San Diego region has slowed in the past year amid high interest rates and other macroeconic factors, though the region has a tight apartment vacancy rate of 4.6% with rent growth of 1.2% in the past year, according to CoStar data as of Dec. 11.

The region posted $1.7 billion in apartment sales during the past 12 months, down 61.1% from the prior year. The deal for Margo at The Society in Mission Valley was the region’s fourth-largest apartment sale of the past year by total price, CoStar data showed.

“I’m not sure that it speaks to a revival in the local investment market,” said Joshua Ohl, senior director of market analytics for CoStar Group in San Diego, regarding the Mission Valley sale. “There are a great many market participants who expect investment activity to remain relatively subdued next year due to elevated interest rates, slowing rent growth and broader economic concerns.”

“But it does speak to the strength of core assets in premier locations in San Diego,” Ohl said. “That property is one of the newest in Mission Valley, and it is centrally located with great amenities, including a five-minute drive to the beach.”

Rising Availability Hits Biotech Labs

COSTAR INSIGHT

Rising Availability Hits Biotech Labs

Wave of New Lab-Oriented Office Space Threatens To Overwhelm Stagnating Demand

Flex lab buildings have demonstrated resilient performance amid a pullback in demand for more office-focused biotech space. (Getty Images)

By Phil Mobley
CoStar Analytics

September 17, 2023 | 8:13 P.M.

While explosive growth in life sciences in the past decade has stoked demand for lab space, making it a hot commercial real estate niche for investors, demand for lab space in office buildings has softened. That comes just as construction is completed on millions of new square feet of property.

The type of lab space required for life sciences research is not easy to define in generic terms. Much of it is built to stringent requirements based on the organization's particular needs. Broadly speaking, much of the early-stage research into the efficacy of new, high-tech applications in medicine, agriculture and other biological sciences takes place within facilities of major medical and educational institutions, often with the aid of government funding. From there, a promising concept may attract outside investment, at which point the researchers begin to scale efforts in their own space.

This space is often housed within a building that looks like a traditional office building, located in proximity to the institutions from which the new entity sprang. It is common that 50% to 70% is devoted to highly specialized scientific research, with the remaining 30% to 50% serving as administrative office space. These highly customized build-outs are a double-edged sword, making tenants sticky but also sometimes presenting difficulties for repurposing the space for other users, even those also in the life sciences sector.

As research and testing progress, the needs of the organization can change. They may soon require more storage space for chemicals, tissue samples and other special materials. They may also need facilities in which to begin manufacturing and distribution, a function often outsourced to contract research and manufacturing organizations. These buildings can look less like office buildings and more like small-scale industrial or flex buildings, and it is not always as crucial that they be located as close to the core of the research ecosystem.

It should be noted that, though the scenario described above is representative, there is a great deal of variability in how life sciences research is carried out and in what types of facilities. Still, the relative performance of different types of biotech-oriented real estate reveals some interesting contrasts.

Following the overall trend in the office sector, vacancies in lab-oriented office buildings began rising in 2020 with the onset of the pandemic. By early 2021, vacancy had leveled off only to surge again beginning in late 2022 as rising interest rates squelched venture capital investment and throttled demand for new specialty lab space.

But while demand has stagnated, supply has been the larger culprit behind the rising vacancy: Over 7 million square feet of new biotech office space was completed in 2022, nearly twice as much as the annual average over the previous decade. Another nearly 3 million has come on line so far this year.

This supply wave is the result of developers scrambling to meet the needs of an industry in which employment has grown at three times the rate of overall job growth since 2013, and it has been exacerbated by the fact that the depression in demand for traditional office led many owners to pivot their existing buildings toward labs.

On the industrial/flex side, the story has been more nuanced. The pace of demand growth has slackened, but construction has been more modest. It is easier and cheaper to repurpose lab-oriented industrial and flex space for other uses — such as other forms of manufacturing, distribution and research — than it is to do so with custom-built lab offices. Thus, while vacancy in industrial/flex labs has risen recently, it is not outside its historical range from the past 10 years.

The effects of this shifting market are being felt differently across major biotech research clusters in the United States. In the Boston area, for example, three-quarters of lab space in the market is in office buildings. This is in part because of the market dynamics in the research and venture capital ecosystem surrounding the hospital systems and universities in Cambridge, Longwood and other area clusters.

By contrast, almost two-thirds of the lab space in Raleigh-Durham, North Carolina, and San Jose, California, is in industrial or flex buildings, a function of both the availability of land and the types of research centered in these markets.

The impact is clear at the level of specific geographic clusters. About one-third of the largest industrial/flex lab clusters now have an availability rate exceeding 20%, most outside major urban areas. A higher percentage of the largest office lab clusters meet or exceed the 20% availability threshold, including some in the central parts of Boston, San Diego and San Francisco.

There is reason to believe that the current challenges in biotech-oriented real estate will be relatively short-lived. The long-term drivers of government funding, an aging population and technological advances with the potential to improve quality of life are significant tailwinds. In the near term, however, there appear to be struggles ahead for several oversupplied lab clusters, especially those where the industry tends to occupy more space in office buildings.

San Diego’s Apartment Investment Market Sees Lackluster Sales

San Diego’s Apartment Investment Market Sees Lackluster Sales

Investors Display Caution Amidst Rising Interest Rates

By Joshua Ohl
CoStar Analytics

August 9, 2023 | 9:13 AM

The relatively sluggish apartment investment market in San Diego weighs heavily on investors who are showing caution following the strong interest rate growth of the last year, which has been reflected in the drop in transactions across the region.

Between 2015 and 2019, San Diego averaged more than 140 quarterly multifamily sales. With fewer than 65 sales closing last quarter, representing a 40% decline compared with the second quarter of last year, there have been less than 120 deals through the first half of 2023. Consequently, the quarterly average during the past year has only been 63 transactions.

The $400 million in investment volume during the second quarter was a 10% increase compared with the first quarter, although it still represented one of the lowest quarterly volumes in the past 10 years and a 60% drop compared with the second quarter of 2022.

In recent years, investment volume peaked during the last two quarters of 2021, when $2.3 billion and $1.9 billion in deals were transacted. Even last year, three of four quarters exceeded $1 billion in sales volume. Sales volume through the first half of this year was down more than 60% compared with the first half of 2022.

The average transactional capitalization rate recorded by CoStar research is similar to the first quarter average of 4.5%, which is a nearly-100 basis-point jump compared with the average transactional cap rate recorded during the first half of 2022.

Properties in suburban locations have seen an average cap rate of 4.7% in 2023 compared with 3.5% in the first half of last year. Urban properties, meanwhile, have traded at an average cap rate of roughly 4.3% in 2023 compared with 3.7% during the first and second quarters of 2022.

Market participants are likely to continue to navigate a period of pricing discovery coupled with property expenses from maintenance to insurance all having increased. Some landlords have seen insurance rates skyrocket by more than 50% per unit in the past 12 months.

Although demand has returned in 2023 and household formation has ticked up, more than one investor in San Diego has noted that they anticipate more of the same through the rest of the year.

San Diego Moves Forward on Civic Center Redevelopment City will solicit bids for sale or lease of five downtown, city-owned blocks.

San Diego Moves Forward on Civic Center Redevelopment

City will solicit bids for sale or lease of five downtown, city-owned blocks.

By Jack Rogers | April 18, 2023 at 06:02 AM

San Diego is moving forward on what may be the biggest economic development prize in the city this year, a competition for five downtown, city-owned blocks.

Last week, the City Council’s Land Use and Housing Committee voted 3-1 to clear the way for the city to solicit bids for the sale or lease the property under California’s Surplus Land Act.

The committee’s action, if approved by the full council on April 24, also will allow San Diego to undertake a second process to build a new City Hall on a sixth, adjacent block to the site that is being put on the market, according to a report in the San Diego Union-Tribune.

The Land Use and Housing Committee resolution also allocates $2M to pay for consultants who will conduct due diligence and evaluate bids for the city-owned land.

Mayor Todd Gloria has championed the project, known as the Civic Center Revitalization, which envisions replacing the six-block, 8-acre City Hall complex with new facilities for city worker as well residential units reserved for low-income families.

“This is really an exciting opportunity to take an area that many have viewed as having serviced its useful purpose already, and to create a Civic Center for San Diego that will be a point of pride for our entire city,” Councilmember Stephen Whitburn told the newspaper.

To facilitate the redevelopment, the city will declare the five blocks of downtown property as surplus land that is no longer required for municipal use and is therefore subject to the state’s Surplus Land Act, which is a form of eminent domain.

The Surplus Land Act requires the city to distribute a notice of availability to affordable housing builders registered with the state who then have 60 days to respond with interest.

The city is required to engage in a 90-day negotiation period with the respondents and give what is known as first priority to the bidder proposing the highest number of affordable housing units—those that are deed-restricted for families making 80 percent or less of the area median income.

The minimum number of residential units for low-income families must be equivalent to at least 25% of the proposed units in a project.

The surplus blocks will include four blocks bounded by A Street and C Street to the north and south, and First Avenue and Third Avenue to the east and west. The fifth block is occupied by a vacant office tower at 101 Ash St.

The four blocks currently are occupied by the City Hall, known as the City Administration Building at 202 C Street, the Civic Center Plaza office tower, Golden Hall, a public plaza and the 3,000-seat Civic Theatre.

Bidders will be encouraged—but not required—to preserve the Civic Theater, which the operator has said is in need of a $150M renovation, the newspaper report said.

San Diego’s Industrial Market Reaches 10-Year High in Sublet Space

San Diego’s Industrial Market Reaches 10-Year High in Sublet Space

More Space Is Likely Coming

By Joshua Ohl
CoStar Analytics

March 10, 2023 | 1:32 P.M.

San Diego’s industrial vacancy rate has risen by 0.7% during the past 12 months to 3.8%. While still low from a historical perspective, beating the market's long-term average of 7.1%, it comes at a time when leasing velocity has moderated as concerns have spread about economic headwinds.

Part of that shift can be directly attributed to the rise in sublet space across the San Diego industrial market. It has spread across both the logistics and flex sectors locally. The amount available has reached its highest level in more than 10 years, at 2.8 million square feet.

Substantial spaces have been placed on the sublet market from Otay Mesa to Sorrento Mesa and from firms involved in manufacturing and distribution to high-tech and biotech.

At The Campus in Otay Mesa, Panasonic placed 170,000 square feet up for sublease in February and vacated the property. In Sorrento Mesa, Dexcom added more than 90,000 square feet and NuVasive put up 90,000 square feet at the beginning of 2023.

Toward the end of last year, Amazon added three buildings in San Diego to the sublease market, totaling more than 300,000 square feet, as the e-commerce giant followed through with cutting back its real estate footprint across the country.

One of the larger available sublet spaces in the area is at Callan Ridge in Torrey Pines. Healthpeak Properties is underway on a 185,000-square-foot lab campus for Turning Point Therapeutics that is scheduled to deliver at the end of 2023. However, the entire property has been put up for sublease with a term that runs through 2035. Although terms of the lease have not been disclosed, first-generation lab space in Torrey Pines often commands up to $7 per square foot on a triple-net basis.

That might not be the only new construction that is available for sublease.

Sorrento Therapeutics announced in February that it was filing for bankruptcy. It has since announced through a Worker Adjustment and Retraining Notice with the State of California that it was laying off 538 local employees due to a closure.

Healthpeak Properties is also underway on a 163,000-square-foot lab building for Sorrento Therapeutics at the Sorrento Gateway in Sorrento Mesa. That building is scheduled to complete in 2023 with a lease term that runs until 2039. The effective rent was above $6 per square foot, gross.

Sorrento Therapeutics occupies an existing footprint of more than 350,000 square feet in San Diego. While the firm has yet to announce plans for the likely reduction of its local real estate portfolio, there is an expectation that the majority of its space will be added to the sublet market. That would come after the firm concurrently extended all of its local leases by 15 years in 2022.

While more sublet availabilities on the market has provided additional options for tenants in search of space in a relatively low-vacancy environment, it’s worth monitoring the metric as economic concerns weigh on tenant decisions.

Apartment Rents Rise in San Diego for the First Time Since August

COSTAR INSIGHT

Apartment Rents Rise in San Diego for the First Time Since August

San Diego Leads California in Rent Growth

By Joshua Ohl
CoStar Analytics

February 2, 2023 | 8:34 AM

This year has started off on a brighter note for apartment landlords in San Diego. The four-month decline in rents across the region at the end of 2022, which saw rents fall by 2.4%, came to a halt after rents grew for the first time here since August.

That brought average market-rate asking rents in the San Diego apartment market to about $2,340 per month, which represented 5.1% growth over the past year. That was the best performance in California among metropolitan areas with more than 10,000 market-rate apartment units.

In San Diego, rents rose 0.5% in January. That was the strongest monthly rent growth since last July when rents grew at a similar rate. Both luxury and mid-tier properties saw a 0.7% increase in asking rents in January, while workforce housing saw a marginal adjustment of 0.01%.

On an annualized basis, rents in four- and five-star properties have risen by 4.1%, while three-star properties climbed 6.1%, and one- and two-star properties recorded year-over-year rent growth of 4.8%.

That unorthodox performance was antithetical to demand. Over the past 12 months, net absorption, which measures the change in occupancy over time, tumbled by roughly 1,400 units in workforce housing and about 800 units in three-star buildings.

Conversely, luxury properties single-handedly have kept net absorption marginally positive in the past 12 months, after nearly 2,300 units were absorbed during that period. Average market rents in those properties are now above $3,200 per month.

Due to rising unaffordability driven in-part by high housing costs, persistent inflation and rising interest rates, household formation has largely come to a screeching halt across San Diego. Many renters are reluctant to move as they face concerns about finding a new apartment that is cheaper than their current one.

Landlords are also working through eviction proceedings that had largely been placed on hold since the start of the pandemic. That could loosen vacancy even further in pockets of the region. As it currently stands, the vacancy rate has risen to 4%, a 150 basis point jump in the past 12 months. That’s the highest apartment vacancy rate seen in San Diego since the end of 2020.

San Diego is certainly in the midst of a correction after the turbo-charged environment in 2021 that saw demand reach an all-time high, and rent growth reached a similar peak of 14%. But the correction is more of a normalization of the region. Nominal rents are still growing above the long-term average of 3.5%, and the rate is expected to settle near that historical average by the end of this year.