San Diego Market Produces Big Returns for Investors

Parallel Capital Partners has achieved substantial returns on a Sorrento Valley office portfolio. Parallel purchased the portfolio in 2012 from Collins Development Co. for $63 million, and has just sold the final 12 office buildings in the portfolio for $112 million to Longfellow Real Estate Partners. Along with two earlier sales, the entire portfolio traded hands for $149.2 million. Parallel infused $10 million into the final 12 buildings, known as the Inspire Portfolio.

“The Collins portfolio represented a rare opportunity to acquire a critical mass of non-homogenous but extremely well located light industrial and office buildings in La Jolla, Sorrento Valley and Rancho Bernardo,” Matt Root, CEO at Parallel Capital Partners, tells GlobeSt.com. “Not all that long ago, light industrial buildings were considered a step down for premier tenants. The market has changed. Now from New York to L.A., creative spaces are not only in demand as places to work, they now are sought after, command premium prices and influence the design and direction of traditional class-A buildings. Changing real estate markets and economic factors over the last decade have dictated that older buildings accommodate uses disparate from their original design intents.”

San Diego offers investors a relative discount to other Southern California markets, according to Root, and this allowed them to achieve these substantial returns. “Our ability to acquire the portfolio at a favorable basis allowed us to successfully implement our strategy of creating workplace environments that occupiers desire,” says Root. “We simply realized that change is inevitable, and that occupiers are demanding a better workplace environment.  We also benefited from the strong capital flows into commercial real estate—both debt and equity. “

In addition to the ability to find a good deal in San Diego, the market also has seen an inward flow of capital, which has fueled office demand and property values. “The appreciation is also reflective of strong capital flows into not only the commercial real estate markets, but also VC capital flows into the life science sector,” says Root.

With rising costs, it is unlikely that Parallel could make the same investment play today. “We could definitely create the workplace environments that are in demand today,” says Root. “However, from a pure investment perspective, asset pricing in San Diego—like a lot of coastal markets—is priced to perfection, making it very difficult to acquire assets at a basis that would allow us to commit the proper amount of capital back into the buildings.”

Parallel has a long-term commitment to the San Diego market, and is continuing to look for opportunities. The firm likes the high quality of life, strong barriers to entry and long-term job formation in the market. “The San Diego economy has a diverse group of drivers such as defense related manufacturing and services, biotechnology R&D, high-tech communications, leisure and hospitality, and world-renowned research institutions,” says Root. “Today, however, there is a wall of capital chasing real estate transactions and many offerings are priced to perfection.  As a yield-oriented investor, I think we are a net seller in San Diego versus a net acquirer today.  We are currently focused on best of class assets in secondary rings of primary markets or secondary markets and industrial development opportunities in Las Vegas.”