Is Carlsbad Next for Office Growth?

CARLSBAD, CA—Davlyn Investments has acquired a 74,807-square-foot office property here from LNR, a special servicer for the lender/seller, for $16.4 million. Carlsbad is a market that's “next in line to enjoy the economic growth already seen throughout the country,” according to Davlyn's director of office acquisitions John Hale.

The firm recently closed escrow on the project, known as Paseo Summit, a two-building office park in the northern San Diego submarket that is currently 83% occupied. This makes the multifamily and commercial property investment and property-management firm's second office-property purchase in Southern California. Michael Roberts and Brunson Howard of Cushman & Wakefield represented LNR in the transaction, while Davlyn represented itself; lending was provided by City National Bank and Ryan Blair.

Regarding the asset's appeal, Hale says, “The acquisition of Paseo Summit further strengthens Davlyn's class-A presence in the I-5 corridor. We foresee the ability to grow rents aggressively over the next five years as the Carlsbad office market recovers from the recent recession.”

Hale adds that the office recovery initially bloomed in the Sorrento Mesa submarket of San Diego, also in North County, in 2013 and has steadily moved north up the I-5 and I-15 corridors. He says his firm believes that Carlsbad is next up for this recovery.

Davlyn has several improvements planned for Paseo Summit to enhance its appeal to class-A tenants, including upgrading the bathrooms and lobbies, modernizing the exterior and installing the firm's signature “Park,” an exterior recreation/meeting area “that's become the norm for upscale creative-office projects throughout California,” according to Hale.

Davlyn's CEO Jon Williams adds, “We are thrilled to acquire Paseo Summit at such an attractive price, and given the interest we already have from prospective tenants for much of the existing vacant space, this property is primed to provide strong cash flow to our investors for years to come. In addition, the property offers an irreplaceable coastal location, ocean views from numerous suites and proximity to numerous high-end amenities. These factors uniquely position the property as a solid competitor in the class-A market throughout the northern reaches of the I-5 corridor.”

According to Jones Lang LaSalle's fourth-quarter 2014 office report, Carlsbad's average asking rental rate is $2.31 per square foot, higher than the burgeoning Downtown submarket at $2.24. The report also says that rents continued on their upward trajectory throughout San Diego County, increasing 6% year-over-year as the supply of large blocks and high-end class-A space continued their decline, and the fourth quarter marked the 10th straight quarter of positive rent growth. While there remain areas of value and opportunity in lower-demand submarkets, as well as in older office space across the market, quality class-A space remains scarce. In fact, the report says, the direct vacancy rate has reached the single digits for this asset at 9.9%, the lowest level in almost 10 years.

Hale tells GlobeSt.com, “Vacancy rates in Carlsbad are trending downward because of the improving economic environment and lack of new construction. As a result, we foresee solid rent growth, especially along the coast.”