Buyers found for San Diego offices

Real Estate Alert, May 19, 2004

Deals have been struck for two high-end office properties in San Diego.

Local player American Assets made a successful pre-emptive offer of about $96 million, or $290 a square foot, for the 330,000-sf building at 225 Broadway in downtown San Diego. Meanwhile, Principal Global Investors, acting on behalf of its Real Estate Separate Account core fund, agreed to pay $93.5 million, or $263/sf, for the 356,000-sf Seaview Corporate Center in Sorrento Mesa, an outlying submarket.

The agreements demonstrate that the San Diego office-sales market continues to sizzle. Some $365 million of large deals have been struck this year, on top of $1 billion for all of last year. What's more, San Diego has seen a number of properties trade at initial yields of 7% or less, a level increasingly popping up in New York and Washington, but less common in Southern California. That includes the two deals under contract, although the yield for Seaview will climb to more than 8% later this year when rent abatements end for various tenants.

The 22-story building at 225 Broadway, known as the NBC Building, is 96% occupied. Tenants include NBC, which is a unit of General Electric, as well as San Diego County and Sempra Energy. The property, which was built in 1976, has undergone $7 million of renovations since 1996 that lifted its status to Class A and added 28,000 sf. The building includes a 560-car garage.

American Assets, which is headed by Ernest Rady, is buying the property from GE Pension Trust and local player Sentre Partners. The sellers retained Secured Capital to handle marketing, but American Assets make its bid prior to broad marketing.

American Assets may have had the inside track because last month it bought a nearby building--the 401,000-sf SBC Plaza, at 101 West Broadway--from GE and Sentre. The $116 million deal was also brokered by Secured Capital. GE and Sentre acquired both 101 West Broadway and 225 Broadway in 1997 for a total of $72 million from LaSalle Investment Management.

Principal Global is buying the four-building Seaview Corporate Center from Angelo Gordon's AG Core Plus Realty Fund and local player Shidler Group. The property was listed with Secured Capital in October, with the understanding that the buyer would assume a $38 million mortgage. But some potential bidders complained that the loan--equal to only about 40% of the expected purchase price--was so small that a buyer would have to arrange additional financing.

So the Angelo Gordon team halted its marketing campaign in December to give it time to persuade the lender, Equitable Life, to increase the size of the loan to about $55 million (roughly 60% of the purchase price) for the buyer. Marketing resumed in February, with Secured Capital contacting 10 investors that had shown initial interest in the fall.

The complex is 95% occupied, led by recently added tenants Computer Associates, Plus Orthopedics and Pfizer. Those tenants received 10 months of free rent while tenant improvements were completed. The new leases, which run through 2013, average $27/sf, plus electricity costs.

The Angelo Gordon team, which has spent more than $1 million on renovations, bought the complex in 2002 from LNR Property for $62.5 million.