Q2 2026 Case Study: Value-Add Execution at Arroyo Business Center

Get an exclusive look into BKM's impressive property transformation at this 65K SF asset in San Diego, CA.

To download and view the full case study, click here.

PROPERTY OVERVIEW

• Situated just south of Palomar Airport and three miles east of I-5, the property offers superior regional connectivity between Orange County and San Diego, with suites ranging from 4,000 to 12,000 SF and 18’ clear height warehouses built to serve the region’s expanding industrial tenant base.

• Featuring 10 units and a ~50% office buildout at acquisition, BKM recognized an opportunity to modernize dated, passively managed suites and convert them into creative industrial space.

OPPORTUNITY

Aesthetic Appeal:

• Expansive parking enhances curb appeal and suite-level accessibility.

• Limited prior capital investment unlocks immediate value creation through BKM’s signature exterior improvements package.

• High office concentration offers flexibility to reconfigure units and meet evolving tenant demand.

Financial Appeal:

• Acquired at a 39% discount to replacement cost, with in-place rents 20% below market at $0.97 PSF NNN.

• With 87% of rentable SF expiring during the hold, BKM had a clear runway to drive rental rate growth of 12–22%.

• Underwritten at a 19.6% levered IRR and 1.9X equity multiple, with a projected exit of $15.1M.

NEARBY BKM PROPERTIES

MARKET DYNAMICS

• 5.3% vacancy for small-bay properties in San Diego, which is 43% lower than the general market vacancy for the region.¹

• Industrial rents have grown nearly 40% since 2020, with forecasts expecting another 10-15% of growth over the next four years.¹

• Leases for spaces under 10K SF dominate total leasing in the greater San Diego region, capturing 80% of total leases signed in 2025—the highest share in over five years.²

• San Diego’s proximity to the U.S.–Mexico border, combined with its role as a major tourism destination, supports long-term regional economic activity and cross-border logistics demand.²

• Over 45% of residents hold a bachelor’s degree, supporting a highly educated workforce.¹

• Net absorption rebounded significantly between 2024-2025, with the upward trajectory expected to continue in 2026 as vacancy stabilizes and the market recalibrates.³

¹CoStar, Q2 2026. ²CoStar, Q1 2026. ³JLL, Q1 2026.

FOCUS ON GROWTH - SIC CODES

• The park provided a diverse array of tenant industries at acquisition, varying across 7 different sectors. Even in a smaller park, no tenant or industry takes up more than 44% of NRA, reducing exposure to credit risk.
  

EXECUTION PLAN

• Total CapEx: $1.2M (~$19 psf) improvement program focused on enhancing functionality, tenant experience, and long-term asset performance.

• Tenant Improvements: Suite configurations were modernized and reconstituted to attract a stronger, higher-quality tenant base while justifying rental increases.

• Building Systems: Capital was strategically deployed across building systems to address deferred maintenance, improve operational reliability, and support sustained occupancy throughout the hold period.

• Cosmetic Upgrades: Significant cosmetic enhancements were made to elevate the property’s physical presentation, transforming a neglected private-owner asset into an institutionally repositioned business center competitive within the Carlsbad industrial submarket.

Exterior Improvements

Interior Improvements

PROPERTY TRANSFORMATION

SUITE CONVERSION

RESULTS

• 82% growth in NOI, exceeding underwriting for multiple quarters.

• Average occupancy of 94% during ownership period.

• Delivering an 89% increase in value over a 4-year hold and exceeding underwriting by 25%, BKM acquired Arroyo Business Center for $10.2M in January 2019 and sold for $19.3M in June 2024.

• 64% increase in in-place rents between acquisition and disposition, with average in-place rents of $0.98/ft in 2020 and $1.61/ft in 2023.

• Mark-to-market potential at disposition was just 3.36%, down from nearly 17% at acquisition, reflecting BKM’s ability to bring leases to market.

• 14 leases executed across the hold period, reflecting consistent demand and active lease-up throughout BKM’s ownership.

• 3-4 month average downtime for vacant suites during the ownership period.  

• 17% average quarterly mark-to-market increases on lease expirations between 2020 and 2023.

To download and view the full case study, click here.