By Gary H. London
As Published in the San Diego Business Journal: June 10, 2013
Internet retail giant Amazon.com recently announced expansion plans for downtown Seattle, including a 65,000-square-foot “biosphere” made up of three glass-and-steel domes as part of a three downtown block acquisition with plans to build 3.3 million square feet of office space.
Over the past 15 years, downtown San Diego has only added 1.3 million square feet — in total.
While there are three buildings in the works — potentially totaling two million square feet — they will not be built until or unless a proven big tenant will commit to occupying them. One, the 300,000-square-foot Cisterra building, is reported as a conversion from what was to be a residential tower to Sempra Energy’s new downtown headquarters.
That is a zero add in terms of downtown occupancy, which currently stands at 84 percent.
Downtown lease rates have slipped also, on average from $2.72 (per square foot, per month) six years ago to $2.09 today. Recent deals have been at rates ranging from $1.65 to $2.30, suggesting that the average is trending even lower. If you are a building owner, this is dire.
Moreover, until or unless downtown reinvents itself with some kind of infusion from the business community, it will remain, at best, a flat office market for the foreseeable future.
My view is that the flatness of this market is not just cyclical. This may be permanent in light of the competition from suburban corridors, and the notable shift of public policy interest away from downtown.
Change for the Worse?
By any of these metrics, or others more mundane, downtown seems to be slipping in importance. Just look around. Lunchtime restaurant venues have closed over the recessionary period, and few have reopened. The restaurant scene is mostly supported by visitors coming to conventions and frequenting the Gaslamp Quarter.
Walk down the major business streets of downtown, B and West Broadway. They are emptier than at any moment in the 30 years I have been walking these streets.
Look at the buildings. Over these same 30 years, the Class A inventory has actually decreased along the B Street corridor. The only Class A structures that have been built are on the west side on or near West Broadway.
Look at City Hall, or the block across the street that houses the defunct California Theatre building. These embarrassing structures “anchor” C Street. The street front is mostly empty and barricaded. The street scene does not suggest prosperity, commerce or, frankly, civic interest.
“This contrasts sharply with the residential renaissance which has taken place downtown. Over the past decade, approximately 13,000 housing units have been built, which is roughly an addition of 10.5 to 12 million square feet of space.” Currently, we count 1,650 residential units under construction, mostly apartments in the East Village, the last downtown neighborhood where land remains. There are two dozen rental and condominium projects now working their way through the entitlement process, which will add 5,000 units once erected over the next 5-7 years.
It’s a residential boom that is fueled by consumers who will mostly commute to their jobs outside of downtown. Apparently, it is stylish for residents to live downtown. Yet, their employers often don’t choose downtown for their location.
This is not a minor thing. These crossing dynamics suggest that downtown San Diego is arriving soon at a fork in the road, of sorts. Either there is renewed interest by the business community to be here, or, eventually the loss of commerce will translate as a loss of the regional importance of downtown.
This will play out, regardless of the residential strength, or the success of the Gaslamp, or the presence of the Padres at Petco Park. Those are for guests. The soul of the market is slowly slipping.
Amazon won’t be moving to San Diego. In fact, the point of starting this commentary with Seattle is to remind us that Amazon is in Seattle as are Microsoft and Boeing because their founders lived there and started their companies there.
That has to be part of the formula in San Diego, as it has been for Seattle and San Francisco. Unfortunately, neither our greatest success story, Qualcomm, nor its many progeny, have shown an interest in downtown. They do not recognize that if downtown loses its luster, so, too, does the fundamental attractiveness of their institutions and industries in the region.
All is not lost: There should be tech interest in downtown, at least if that interest is measured by those who are mostly going to occupy these many new residential apartments and condos now under development. These are young, Gen Y/Millennia types. Surely they are to a great extent occupied in San Diego’s substantial tech business. They just do not wish to live (or unable to find housing) in Sorrento Mesa.
But somebody has to pull the trigger. Maybe that will happen in the couple of projects announced for East Village. One project announced is Makers Quarter, a proposed 2.9 million-square-foot mixed-use gem on East Village property owned by the Navarra family — of Jerome’s Furniture; the other is also in East Village at Park Boulevard and E streets by Lowe Enterprises Real Estate Group and I.D.E.A. Partners’ Pete Garcia and David Malmuth. It would consist of an office building and apartments linked by an interior atrium and plaza.
These are great concepts, but there are no announced tenants and, at best, they will take some years to be developed. Until then, the key is to bring much more substantial and focused attention to the area. In years past, the leaders of redevelopment involved themselves with CCDC (Centre City Development Corp.) which has “sunsetted” along with redevelopment law. Downtown promoters like Ernie Hahn (who built Horton Plaza Shopping Center) and many others have come and gone.
The leadership has been there in the past, but it now seems that there is a perilous gap. In any event, this leadership has to come not just from the stalwarts such as the Downtown Partnership, but from the mayor and City Council.
City leadership in particular simply has to step up and do something about their own building, 202 C St., which not only is a civic embarrassment, but a deadweight taking down the entire hub of downtown.
They also have to get involved in cleaning up the streets. Dirty, smelly, unsafe, unfriendly: These are just some of the adjectives I would offer up to describe the C Street corridor and its environs.
No company like Amazon is going to take the risk without a civic partnership. Without that combination of effort, no amount of downtown boosterism is likely to stop this slippage from a once proud renaissance to a potential urban deadend.
Gary H. London is president of The London Group Realty Advisors, which provides real estate consulting and economic analysis. Visit: londongroup.com.