Kilroy Realty Plans Office Tower in San Diego’s Little Italy

Kilroy Realty is doubling down on the San Diego office market. The firm has acquired a 1.3-acre land site for $42 million in Downtown San Diego to build a 275,000-square-foot office tower. The property is directly adjacent to Kilroy’s 220,000-square-foot 2100 Kettner development, illustrating the firm’s bullishness on the market.

At four parcels, a land site of this size is a rare opportunity in the Downtown San Diego market. The property is located at 2045 Pacific Highway in San Diego’s Little Italy neighborhood. Cushman & Wakefield’s Kevin Nolen, Mike Novkov, Tim Winslow and Jason Kimmel represented the seller, Pacifica Companies, in the deal.

The brokerage team is excited about the prospects of this project, saying that Kilroy will bring much needed class-A office space to the area, which has had limited speculative office construction. It also signals confidence from a leading developer that the office market is poised to rebound, particularly in a technology and life science hub like San Diego.

Kilroy purchased the land site as part of a trio of separate transactions early this month. In addition to this purchase, the develop entered the Austin market with the acquisition of Indeed Tower for $580 million. The 36-story, 730,000-square-foot office property is LEED-Platinum certified and located in the Austin’s central business district. The building is 57% leased with Indeed.com as the largest tenant in the building, occupying 42% of the property through 2034. Kilroy plans to drive value through the strategic lease up of the property, and there is a lot to offer. The building has 30,000-square-foot floor plates and offers tenants 10,000 square feet of ground floor food and beverage space and 30,000 square feet of outdoor deck space.

The Austin office market was badly impacted by the pandemic. Research from CommercialEdge shows that Austin was one of the top three cities with the highest increase in office vacancy during the pandemic. The city’s vacancy rate grew 720 basis points.

San Diego hasn’t fared much better. According to research from Marcus & Millichap, the vacancy rate in the local office market is at a nine-year high of 16.1%, a 380 basis point increase from 2019. The class-A vacancy rate is even higher at 20.8%. New construction deliveries in Downtown San Diego will push vacancy rates higher this year. As a result, Marcus & Millichap expects the rate to continue to grow another 140 basis points this year to 17.1%, the highest rate since 2009. The cause is largely due to several speculative office developments scheduled to deliver in Downtown San Diego this year.