Not to be outdone, the office sector joined San Diego’s other property sectors in 2021 by recording the highest level of sales volume in 15 years. The region saw more than $3 billion in office properties trade hands, only the second time in more than 20 years that investment volume eclipsed that figure.

After transactions were largely put on hold in the beginning of the pandemic, investors surged back into the San Diego office market in 2021, representing a 40% jump in transaction activity from 2020.
The market sale price, which is based on the estimated price movement of every property in the market, rose roughly 4% in 2021, while the market capitalization rate fell a few basis points to 6.2%.

National investors accounted for the bulk of investment volume, totaling almost $2 billion, while foreign investment clocked in at nearly $200 million, which was the highest level locally since 2018 and the third-highest level in the past decade.

Buyers received an average discount off the asking price of nearly 7% in 2021.

Sorrento Mesa was front and center in the investment market last year as investors continue to be attracted to San Diego’s life sciences nodes. There, buyers have the potential to convert older office buildings with developable land into high-end lab space to accommodate the region’s expanding biotech tenants. Sorrento Mesa recorded more than $725 million in completed transactions in 2021, many of which included campuses with a mix of flex and office buildings.

City Office REIT sold its portfolio in Sorrento Mesa for $576 million to a partnership involving Sterling Bay | West and Harrison Street Capital in December. The sale was one of the highest volume commercial deals in San Diego in the past 20 years. The sale included development land and eight flex and office buildings filled with tech and life sciences firms. With the deal, Harrison Street has invested roughly $800 million in Sorrento Mesa since 2020.

During the third quarter, Prime US REIT, a public real estate investment trust headquartered in Singapore, purchased the two-building Sorrento Towers campus for $146 million, or almost $493 per square foot, at a 4.9% capitalization rate. Dexcom occupied nearly half of the campus with a lease expiration in 2028, and the balance was filled with tech and life sciences firms. The seller, Shorenstein Properties, had acquired the campus in 2018 and spent $8.4 million in upgrades to both buildings to include renovations to the open-air plaza, lobbies, elevators, common areas and amenity spaces.

Alexandria Real Estate Equities has been one of the most active investors in Sorrento Mesa over the past several years. During the second quarter, the public REIT acquired the five-building Lusk Mira Mesa Business Park, which has since been renamed Sequence Drive Alexandria, from John Hancock Real Estate for $298.5 million. The campus totals 482,154 square feet of flex and office space. Although the buildings were 100% occupied at the time of sale, the REIT expects to add space through ground-up development and the redevelopment of existing spaces upon expiration of in-place leases.