SAN DIEGO—The highly skilled and educated workforce combined with an ideal quality of life make the Northern San Diego office market attractive to the core-plus and value-add investor, Buchanan Street Partners' president Tim Ballard tells GlobeSt.com exclusively. We spoke with Ballard after the firm announced the purchase of two San Diego-based office properties—the Carlsbad Airport Corp. Center and Cornerstone Heights in the Sorrento Mesa submarket—about why San Diego appeals to his firm and what 2015 has in store regarding acquisitions.

GlobeSt.com: What was unique for you about these two San Diego acquisitions?

Ballard: At a high level, Buchanan Street is always looking at core properties, and both of these properties had core-plus and value-add. We liked that San Diego proved nice absorption numbers and rent growth, with the opportunity to increase rents over time. Plus, we bought these properties at significantly better than replacement costs. The Carlsbad asset was $160 per square foot, and replacement costs today are somewhere around $240 per square foot. With all the absorption going on, tenants will need new buildings as the market stabilizes. And the Carlsbad asset of 6/1,000 is highly desirable and rare in the marketplace.

GlobeSt.com: How would you characterize the state of the San Diego office market?

Ballard: It had a significant amount of recovery over the last couple of years. Carlsbad, as an example, had peak vacancy in 2008 of 35%, and today it's down to about 17%, so the market has absorbed a lot of space. If this trend continues, it will be stabilized soon at about 10% to 12%. In Carlsbad, specifically, rents went up over the last two years about 10% in response to space being absorbed. The cranes come out whenever people will give developers money, but so far we're seeing more discipline on construction-lenders' part. We haven't seen construction in Carlsbad for a while—the rents just don't justify it yet.

GlobeSt.com: What's attractive to both users and investors in this market?

Ballard: In both Sorrento Mesa and Carlsbad, there's a highly educated workforce and a talented engineering base of people who like the quality of life and the weather. Carlsbad housing is more reasonably priced, and you don't have to deal with the traffic as you would down in Del Mar. Lifestyle companies, golf and technology show up in places like Carlsbad. The decision makers would rather be there than fight traffic, and this helps us as landlords to drive rents and values.

In San Diego as a whole, many law firms used to be located in Downtown San Diego, but now as new partners have come into these firms, none of them live Downtown; the center has moved much farther north than it used to be. The overall absorption of the marketplace is much more focused in the north than it is in the south; Del Mar is really the center of it all now.

GlobeSt.com: What else do you have in your 2015 acquisitions pipeline?

Ballard: We expect to purchase about $500 million of real estate—maybe more—in 2015. We're currently in process on three office buildings in Texas—two in Dallas and one in San Antonio—that we expect to close in 30 to 60 days. We've been an active investor there since the 1990s. We expect to continue to invest there, since that market is showing a lot of the dynamics you want to see in terms of job growth and corporate relocations. You have to be thoughtful about the kinds of buildings you buy and the kinds of locations. We will continue to see lower- and generic-quality real estate users move to locations that are more business friendly, but Sorrento Mesa has a high concentration of highly skilled engineering and high-tech talent that you can't replicate in other areas of the world. Especially in San Diego, we will see creative office and interesting space in order to retain employees, but the generic-type assets that don't lend themselves to that will be more challenged. We continue to be a very active buyer of value-add and core-plus real estate, both on leveraged and non-leveraged assets, and we also will act as lender in the $5-million-to-$150-million space.