Older Office Submarket Getting New Attention from Buyers

San Diego’s Governor Park has recently seen several office properties change hands, including this one at 6256 Greenwich Dr. that was purchased in January 2017 by UC San Diego as part of a four-building portfolio.

While the shiny new office buildings in places like University Town Center continue to grab the spotlight , San Diego’s often overlooked Governor Park submarket, with several older properties dating back to the mid-1980s, has gotten some significant investor attention in the past year.
Since January 2017, eight Governor Park office buildings – 42 percent of its total inventory of 19 office buildings – have changed hands, in four separate deals totaling more than $127 million.

The biggest was the January 2017 purchase of four buildings on Greenwich Drive totaling approximately 260,000 square feet by the Regents of the University of California, operating locally as UC San Diego, for approximately $83.5 million from Blackstone Group’s Equity Office Properties.

The latest was last month’s $10.8 million acquisition of the 38,000-square-foot Governor Plaza property at 5151 Shoreham Place by Performance Wealth Investments from Palisades Equity Partners. In February of this year, Equinvest Capital bought two buildings with a total of 76,000 square feet – one on Shoreham and one on Greenwich – for $21.5 million from FPA Multifamily LLC.

More changeover could be coming soon. For instance, CoStar data indicates the office buildings at 5080 and 5090 Shoreham Pl. have been placed on the market by their current owner, and the same applies to the property at 6336 Greenwich Dr.

Also, CoStar News has learned that the office property at 5040 Shoreham Pl., totaling approximately 24,000 square feet, is currently in escrow to be sold to an owner-user, though further details were not available at this time, and listing brokers at CBRE Group Inc. declined to comment on the pending sale.

Sources recently contacted by CoStar News said the level of Governor Park office activity is beyond what they’ve previously seen within the same time span, and is the result of multiple factors.

Those include the relative affordability of space in the submarket, the bulk of which was completely built out between the mid-1980s and early 1990s, and its location in the northwest quadrant of the area where state Route 52 meets Interstate 805. That places it not far from much more expensive submarkets with newer product, including UTC and Del Mar Heights to the north.
“Low interest rates, high occupancy levels and decent cap rates are main drivers,” said Tom Wilcox, a senior vice president with Colliers International, who is marketing 6336 Greenwich. “So at least two or three more sales are likely this year.”

“Beyond that it may slow as some of the remaining owners are long-term holders and owner/ occupants, such as DPR Construction,” Wilcox added. “Jumps in interest rates may also discourage further investor interest.”

UC San Diego is now among the biggest property owners at Governor Park, after acquiring the buildings where it had been leasing large blocks of space for several years. Wilcox noted that the university has limited room for growth at its main La Jolla campus and expanding needs for office space elsewhere in the San Diego market.

“We’ll consider buying a property in cases where we already occupy the building, or we’re already doing business nearby,” said Jeff Graham, director of real estate for UC San Diego, whose own office is at Governor Park along with those of other university operations such as UCSD Extension, geared to continuing education.

For the University of California Regents, the purchase calculus includes having a mix of non-university tenants providing steady income and helping to pay debt service on acquisitions. At the same time, lease terms for those tenants can be made flexible enough so that UC San Diego can expand as needed into those spaces in the future. Generally, Graham said, the university will consider buying property and leasing out excess space when it expects to remain in a current location for a minimum period of around 10 years.

The Oakland-based UC Regents have made other big office purchases where it was already leasing space in San Diego, including its 2016 acquisition of the five-building Torrey Pines Court in La Jolla for $134 million. Graham said the same strategy could be deployed again in the future, not only in Governor Park, but other submarkets where UC San Diego has education, research and medical operations, including La Jolla, Hillcrest and downtown San Diego.

Wilcox said other recent Governor Park deals were driven by private investor expectations. For instance, the April 2017 purchase of the 25,600-square-foot building at 5015 Shoreham Place for $11.2 million was made by a private capital investor from the Los Angeles area looking for a decent rate of return; the deal had a 6.75 percent cap rate.

Equinvest Capital’s two-building purchase earlier this year, as well as the most recent single-building deal for Governor Plaza, had per-square-foot prices more standard for the submarket – $291 and $280, respectively. But Wilcox noted that all of these sold buildings had one thing in common: high occupancy rates at the time of sale, in the range of 93 to 100 percent.

According to CoStar Market Analytics , the submarket’s overall office vacancy rate currently stands at 8.6 percent – below the metro market average – and asking rents have grown 1.3 percent over the past year, to an average $2.74 per square foot. There is no new office construction in the pipeline for Governor Park, which is fully built out.

In addition to UC San Diego, its current tenant roster includes the headquarters of software provider Mitchell International, with an array of law, real estate and other financial service firms that have traditionally anchored its buildings.

Mike Novkov, a San Diego director in Cushman & Wakefield’s office division, said the submarket is benefiting from factors that include an increasingly diversified tenant base. He said Governor Park is close to other highly desired office submarkets, and has a stock of good-quality office buildings that remain well below replacement cost – but also in small supply, with under 900,000 square feet of inventory.

Investors recently drawn to the submarket have included 1031-exchange buyers, high-net-worth individuals and other long-term investors.

“The dynamics of Governor Park have changed since the last cycle in two ways: UCSD has anchored nearly one-third of the entire office market with the acquisition of a four-office-building portfolio, and the tenant mix has become more diverse as more technology and educational companies migrate into the submarket,” said Novkov, who performed market advisory in the recent Governor Plaza deal and has been retained by the buyer to continue leasing services along with Cushman’s Bill Cavanagh.

Novkov noted that Governor Park previously was viewed as a submarket dominated by real estate-related firms such as mortgage and title companies, which were impacted significantly during the economic downturn. Currently, the submarket remains one of the most centrally located in San Diego County and benefits from the nearby amenity base in UTC, but with an approximate 15 to 30 percent discount compared to average office rents in UTC.

“We anticipate upward pressure on rents given the declining vacancy in both Governor Park and the neighboring UTC office market,” Novkov added.

Source: CoStar