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Join the Clubs: Hotels Moving Into Gaslamp

Downtown San Diego’s historic Gaslamp Quarter has long been a magnet for tourists and locals drawn to its lively bar and restaurant scene. Recent trends suggest it’s also becoming a major hub for new hotel development.

Briad Lodging Group of New Jersey recently received city approvals to develop a 116-room hotel, to be branded AC Hotels by Marriott, on a Fifth Avenue site where Briad currently operates a TGI Friday’s restaurant. The hotel is expected to open by 2016, though a Briad spokesman said the company for now would have no further comment beyond details already submitted to the city.

The AC will join several other hotels now under construction or in development within and directly adjacent to the Gaslamp Quarter — a 16-block neighborhood bounded by Fourth Avenue to the west, Sixth Avenue to the east, Broadway to the north and Harbor Drive to the south.

San Diego-based J Street Hospitality Inc. currently has a 90-room Courtyard by Marriott under construction at Sixth and Island avenues, set to open by late summer or early fall this year. About four blocks north of that site off Sixth Avenue in East Village, the same company is developing a 154-room Fairfield Inn & Suites by Marriott.

According to its website, J Street Hospitality is also working on Canopy by Hilton, an upscale “lifestyle” brand announced last year by Hilton Worldwide, whose officials said a tower-style hotel was planned for a site at Seventh and Island avenues in East Village, set for a 2017 opening about a block from the Gaslamp Quarter.

Also in the Gaslamp, Encinitas-based developer The Robert Green Co. currently has under construction a 317-room, $100 million luxury hotel called Pendry San Diego, slated to open in 2016.

‘Design-Led Sensibility’

The profiles of Gaslamp hotels under construction and in the pipeline suggest that developers are aiming to reach young visitors and other professionals seeking high-tech amenities and upscale designer touches when traveling.

For instance, before introducing the AC Hotels banner to the U.S. market last year — it is named for its Spanish founder Anthony Catalan and since 1998 operated only in Europe — Marriott International said the brand would target Generation Y consumers, also known as millennials and generally aged 20 to 35. Marriott said its goals included attracting those young hotel customers seeking a “design-led sensibility.”

Bill Shrader, a San Diego senior vice president with brokerage company Colliers International, said the young demographic has long impacted restaurant, bar and retail development in the Gaslamp. And there are now signs, based on tenant inquiries, that migration of millennials to the downtown area could eventually raise demand for office space in the Gaslamp.

Shrader said brokers in recent months have been hearing informally from leaders of small design, technology and Web-oriented companies, checking into possibilities for locating offices near the Gaslamp’s existing vibrant social spots. Millennial-generation company leaders and their workers are increasingly looking for live-work-play setups allowing them to make use of public transit and avoid spending time stuck commuting in traffic.

Rather than downtown’s central business district, many of those potential tenants would like to set up offices in East Village or the Gaslamp Quarter, but opportunities are limited as new downtown development in those areas is focused primarily on apartments rather than offices.

“Right now the only office high-rise in that area is DiamondView Tower in East Village, and that’s filled up,” Shrader said. The next office high-rise to come on line, later this year in East Village, is fully pre-leased for Sempra Energy’s new headquarters.

Clearing the High-End Hurdle?

Brokers are also watching for whether the upscale nature of the new Gaslamp hotels translates into success for future high-end restaurants and stores that might locate nearby.

In recent years, the most successful Gaslamp and Gaslamp-adjacent restaurants and bars have tended to be mid-priced concepts, while high-end restaurants focused primarily on fine dining have struggled. Examples included the recent departure of Donovan’s Prime Seafood and The Palm steakhouse restaurant.

A signal of potential change is the apparent strong start for business at the newly opened Water Grill, an upscale seafood restaurant that replaced The Palm in a space on J Street near Sixth Avenue. “It’s a sign that this neighborhood can support something that’s more of an upscale restaurant,” Shrader said.

A recent first quarter report by brokerage company CBRE Group Inc. noted that San Diego’s retail vacancy rate was 5.6 percent. That’s among the lowest rates for major U.S. metro markets, contributing to a continued rise in local lease rates, but still above San Diego’s low of 2 percent vacancy seen before the recession.

Downtown’s overall retail vacancy rate has traditionally been higher than the countywide average, finishing the first quarter at 6.7 percent. However, high demand and limited space supply in the Gaslamp have kept vacancy rates in that neighborhood much lower in recent years.

As of mid-2013, the Gaslamp retail vacancy rate was just 3.4 percent, making it the second-tightest downtown market after Little Italy at 2.3 percent, according to the brokerage firm now known as DTZ.

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