What's Behind Carlsbad's Amazing Rebound

[IMGCAP(1)]

CARLSBAD, CA—From 35% vacant at the trough of the recession to an anticipated 15% vacant by the end of this year, Carlsbad is attracting a host of new investors, tenant types and development, Brad Tecca of DTZ's capital-markets team tells GlobeSt.com. Tecca's team has facilitated a spate of sales in the submarket recently, including the sale of the 133,079 square foot Carlsbad Executive Plaza by Brookwood Financial to TA Associates for $23.9 million and the purchase of a 65,000 square foot flex/R&D building at 3193 Lionshead Ave. for $8.75 million by Solana Beach-based SR Commercial from Illinois-based Vinturi. We spoke exclusively with Tecca about the growth this submarket has seen in recent years and what it says about the region.

GlobeSt.com: What does the spate of Carlsbad office and industrial sales indicate about the submarket?

Tecca: This is not your father's Carlsbad market anymore. The market has completely changed over the past cycle. Carlsbad has always been a developer's market because there was always quite a bit of land to be developed for office and industrial, but most of that is now gone. West of El Camino Real, there's very little land left for redevelopment, and east of El Camino Real, properties are either being purchased by owner/users or being re-entitled and taken away from office and industrial and converting to multifamily, residential and retail use.

Also, the type of tenant that is attracted to Carlsbad has definitely changed in the last three to five years. Historically, tenants have been residential home builders, title and escrow companies, but now the market is much more diverse. We're seeing life-science, high-tech, clean-tech and action-sports companies comein, which are really driving the market now. Companies from new types of industries want to be in Carlsbad, including professional-services firms like TD Ameritrade and Wells Fargo.

All that tenant activity is going on, and from an investor's standpoint, this is a market that's not even close to reaching past peak highs in terms of pricing on a per-square-foot basis. A lot of investors see this as a market to get into and achieve better yields than other parts of San Diego County and the West Coast. It's definitely an institutionally approved sector of the market since a lot of institutional investors are coming into play now. They see a growing tenant base, a lack of development, and that's attractive to them.

In addition, patterns of growth within San Diego County continue to move north. There's so much residential real estate activity in La Costa, Carlsbad, Encinitas and Olivenhain, and people want to work close to where they live. Carlsbad is easy to get in and out of for tenants, employees and their customers.

Also, a lot of tenants up here are demanding creative-type office buildings and spaces, and because the investors are able to get in at relatively cheaper rates than what they could buy in other parts of California, they can put a lot of new capital into the building to repurpose it—maybe not to the extent of MAKE, but investors are changing the buildings.

[IMGCAP(2)]

[IMGCAP(3)]

GlobeSt.com: What do properties in this market tend to have in common?

Tecca: Since January, we've facilitated almost $300 million in investment sales in Carlsbad, and the majority of that is multi-tenant office. Also, for the most part, all of them have been your traditional-type office space and not creative, but in all of these purchases the investors are going to change the property's appearance.

GlobeSt.com: How is the vacancy rate faring in Carlsbad's office sector as the general commercial real estate industry strengthens?

Tecca: At the bottom of the market, Carlsbad was approximately 35% vacant; now it's south of 20%. Depending on whose market research you look at, it's somewhere between 13% and 19%. There are a lot of leases signed that don't get put into the absorption figures before the space is occupied. We predict we will be at 15% vacant in Carlsbad this year. We had a lot of space to absorb from the bottom, and Carlsbad has done really well. If you compare it to other markets, it's probably one of the best recoveries around.

GlobeSt.com: What else should our readers know about this submarket?

Tecca: With all this activity and new tenants coming into the market, there's also new retail development of assets. Carlsbad did lack amenities in the past, but now all these new amenities are going in. The old Pea Soup Anderson's site is going to be redeveloped, and there's Caruso's big lifestyle center planned, as well as North 40, a 43-acre site on the north side of the Flower Fields, which is going to be a food/beverage/floral production and retail site, along with wineries and restaurants. It's going to be very high end and done in conjunction with the City.