KKR investment arm Drawbridge Realty has landed a double punch with a deal to acquire a high-end Southern California office campus and lease out the complex to a fast-growing defense tech company.
Anduril Industries agreed to lease all three of the buildings at The Hive, a complex in Costa Mesa that Drawbridge acquired earlier this month for just shy of $78 million. The lease, one of the largest in the affluent Orange County area so far this year, is a significant expansion for the defense company that is headquartered right next door at The Press, a repurposed printing plant that now serves as Anduril's corporate hub.
All told, the government contractor's footprint will span just shy of 650,000 square feet across the two complexes.
The Hive, built in the early 2000s and renovated in the years before the pandemic's outbreak, spans about 190,000 square feet across 3333, 3335 and 3337 Susan St. It also includes roughly 3 acres of undeveloped land that Drawbridge executives said comes with "future development potential."
The long-term lease with Anduril was signed the same day that the global private equity partner closed its own deal. San Francisco-based Drawbridge paid a discount compared to the $84 million price tag that seller Invesco Real Estate paid in 2018.
Yet despite the ongoing valuation challenges plaguing Southern California and other major markets across the country, Drawbridge's purchase is the latest indicator that some of the world's largest real estate firms are back in office-dealmaking mode after years of sitting on the sidelines.
“The Hive underscores our commitment to investing in high-quality assets backed by strong credit tenants,” Drawbridge Realty CEO Charlie McEachron said in a statement. Combined with the quality of the property and its desirable location, the firm's "ability to secure a lease with a strong tenant aligns with our long-term investment strategy, making it a natural fit for our portfolio.”
Time to buy
The Hive acquisition fits along two parallel trends rippling across the national office market, where institutional investors are gradually making their return to the capital markets as corporate tenants become increasingly willing to commit to larger blocks of space.
Tenants have adopted a less defensive stance to their corporate real estate portfolios, a shift that has helped drive a 10% bump in national office leasing over the back half of 2024 that has set the stage for continued momentum through the remainder of this year.
An attractive combination of higher capitalization rates, or rates of return, and the widespread stabilization of the national office market's availability rate has helped lure wary buyers and triggered a rapid spike in lending, with more companies willing to bet on the market's upside potential.
That combined optimism has led to a surge in commercial mortgage-backed securities loans tied to office properties, which reached $11.4 billion in the first quarter of this year, according to data from Cuhsman & Wakefield. That is more than triple the amount issued in the first quarter of 2024.
To be clear, the national office market's path along to pre-pandemic levels of activity has been bumpy and increasingly bifurcated.
Occupancy has climbed in about half of the country's largest markets, according to CoStar analysis, with New York City and San Francisco leading in terms of office attendance and landing a majority of the recent blockbuster deals. Pricing for traditional, multitenant buildings has fallen by as much as 50% and is expected to drop even further, especially among older properties with little upside in terms of backfilling record amounts of space.
Yet the return of institutional investors such as KKR show that silver linings are beginning to emerge.
Larger buyers accounted for about 30% of office sales that have closed over the past year, according to CoStar, a significant boost compared to the less than 20% share they had over the prior year.
For Drawbridge, that has meant collectively dropping about $305 million across a panoply of deals, including the Hive acquisition, that have totaled more than 402,000 square feet. Its Costa Mesa purchase closed on the heels of a Seattle-area deal it finalized earlier this summer in which it bought an office building that is fully leased to tech giant Meta on a long-term basis.