Downtown San Diego is well positioned to attract new companies and keep existing ones as more companies bring their workers back to the office, according those closest to the evolving core city.
“I see a lot of ‘Let’s innovate and let’s make downtown where the future is going,’ and that’s what’s happening,” said Betsy Brennan, president and chief executive of the Downtown San Diego Partnership.
“Downtown is ready. We’re the vibrant solution for this region. It’s where there is space, where people are going to expand,” Brennan said. “We are ready to welcome San Diego to downtown.”
Richard Gonor, executive vice president of the commercial real estate brokerage JLL said downtown is on the cusp of a reawakening coming out of the pandemic.
“It’s just a matter of time before some of these larger tech companies that are moving into San Diego realize the opportunity that there is downtown because of the housing that is there, because of the walkability, because of the airport,” Gonor said.
Vacancy
That’s not to say that downtown has been unscathed.
Downtown has the highest office vacancy rate in the county, running at more than 20%, but that figure is misleading, said Derek Hulse, managing director of the commercial real estate brokerage Cushman & Wakefield.
Rather than showing weakness, the high vacancy rate is actually an indication of strength to come.
“While downtown has the highest office vacancy of any submarket in San Diego, it also has the most projects under construction, which is bringing an incredible amount of much needed product diversity to the submarket,” Hulse said.
Of the 19 office projects under construction totaling nearly 3.3 million square feet that Cushman & Wakefield is tracking, more than half – 1.8 million square feet is downtown, Hulse said.
Not More of the Same
Over the last 24 months, about 784,000 square feet of new office space has been delivered downtown, according to Hulse.
The projects include 1155 Island Ave., Kettner and Ash, 2100 Kettner, the Paladion and Twenty by Six.
“Each of those projects is unlike any of the existing Class A inventory in the market,” Hulse said. “The four projects are low-rise, have abundant outdoor areas, access to retail and are amenitized.”
Experts said IQHQ’s $1.5 billion development along the bay coupled with the $275 million redevelopment of Horton Plaza, and the redevelopment of the former Thomas Jefferson law school will be the catalyst to a surge of activity.
“The big news down there (downtown) is what I would call the development of what is not traditional downtown space,” said Stath Karras, executive director of the Burnham-Moores Center for Real Estate at the University of San Diego. “The tech tenants that they’re talking about, especially the life science, are pretty new to the downtown market.”
As those companies locate downtown, the businesses that service them will follow, helping to fuel growth downtown and taking up space in older, more conventional office buildings, Karras said.
“To the extent that some of these new developments bring highly amenitized space and communities, the amenities they bring to that downtown market will be helpful for everyone in the marketplace, not just their tenants,” Karras said.
Tight Submarkets
Matt Carlson, executive vice president of the commercial brokerage CBRE, said executives from regional and national companies are touring downtown projects, a prelude to leasing.
“We have a lot of tour activity and we have a lot of proposals,” Carlson said, adding that interest is strongest for space in Little Italy and East Village.
“You’ve got walkable amenities and both of those have abundant housing as well,” Carlson said. “People are going to make recreation part of their workday. You want to walk to a park to have a meeting or you want to walk to a coffee shop for a meeting or you want to meet your spouse at the end of the day and have dinner.”
Leo Divinsky, managing director asset manager of Stockdale Capital Partners — the firm that’s redeveloping Horton Plaza — said that the campus has had “a significant uptick” in the number of inquiries over the last few months.
“We are in various stages of negotiation with tenants that are looking to come into the project,” Divinsky said, adding that the project is on schedule to be finished in the third or fourth quarter of 2022.
“Downtown offers a lot of unique attributes, including an abundance of multi-modal transportation, entertainment and nightlife, and proximity to a growing number of residential projects,” Divinsky said, adding that its proximity to San Diego International Airport is a major draw.
“Companies looking to fly out their investors, customers, and suppliers have an ability to take advantage of the airport being within five to 10 minutes of their downtown locations,” Divinsky said.
Downtown also is benefiting from a shortage of office space elsewhere in the county, Carlson said, especially in UTC, Sorrento Valley and Sorrento Mesa, where office space is being converted to life science or other uses.
“It’s a very tight in the mid-city markets and there’s 5 million-plus square feet in the county that’s being converted from office to life science, from office to industrial,” Carlson said. “That’s reducing the overall stock of office product by 7% to 10% of the entire market.”
Reverse Commute
One of the considerations being made among employers in their return-to-work planning is whether their current office provides a compelling enough environment to make employees excited to come back together.
With an increasingly diverse mix of new projects, renovations of older buildings and an array of amenities just a few steps away, downtown provides the kind of experiential work environment workers want and tenants must deliver in a post-pandemic environment where competition for workers is intense.
Heightening the interest in downtown is the addition of entertainment venues such as the Rady Shell on the Embarcadero behind the convention center, the construction of the East Village Green park that is about to start, and the $9 million redevelopment of Children’s Park on the south side of Island Avenue between Front and First streets.
Unlike many other big cities – San Francisco and New York for example – San Diego has more people living downtown than working downtown, giving companies a ready pool of talent.
“We’re probably the most reverse commuting city I can think of,” said Norm Miller, Ernest W. Hahn chair in real estate finance at the University of San Diego.
“We have more residential units relative to jobs than most cities,” Miller said. “We’re out of balance.”
The opening of the San Diego Trolley’s Blue Line connecting downtown to UTC, Torrey Pines and the University of California San Diego provides a key link to the historic center of San Diego’s life science and high-tech cluster.
“We’re pretty excited about that increased connectivity to UCSD, UTC and La Jolla as a result of the Blue Line coming on line,” said Divinsky of Stockdale Capital Partners.
Construction of UC San Diego’s new campus at Park and Market streets is also an important attraction for companies considering a downtown location, Divinsky said.
Constraints
Lynn Reaser, chief economist at the Fermanian Business & Economic Institute at Point Loma Nazarene University, said that as people gradually return to work in city cores, “downtown offices must provide a “compelling case for occupancy.”
People are gradually returning to offices in central cities around the country as COVID-19 loosens its grip. However, just as employers must offer a compelling reason to attract workers to come or stay with their firms, downtown offices must provide a compelling case for occupancy.
“Downtown San Diego checks that box in a number of respects. Traditionally, it is home to professional service firms like law, engineering, architectural, financial and design companies,” Reaser said. “New developments may increasingly attract life sciences firms. These companies depend on collaboration for much of their critical work.”
Reaser said that people may also thrive more in an environment of face-to-face interactions.
“Downtown offices have been reconfigured to offer more open space and various amenities, such as gym facilities,” Reaser said. “Restaurants, bars and entertainment are downtown for after-hours engagement. Upscale downtown San Diego housing can attract employees who like the excitement of city life.”
On the downside, Reaser said transportation and parking are a “major constraint” for downtown San Diego.
She said that could become less of an issue as more people are willing to take rapid transit, such as the trolley. Transition
Hulse of CBRE said downtown is “one of those submarkets that if you’re not there living it and breathing it on a daily basis, it changes in a short period of time.
“For the first time in San Diego history, we are delivering projects (downtown) that can accommodate life science. We have projects that can accommodate high tech firms,” Hulse said. “And the great thing is these projects also speak to more traditional tenants – real estate, law, insurance – that are also seeking new space.”
With IQHQ’s project and the redevelopment of Horton Plaza leading the way, downtown will deliver the most new life science space of any submarket in San Diego County.
On top of that, more than 9,500 apartments and condominium units are slated to be delivered in the next five years, said Brennan of the Downtown San Diego Partnership, adding to the downtown workforce.
Gonor of JLL said downtown is in the midst of a transition as the built environment shifts to meet the changing demands of tenant companies.
“In the 1980’s and 1990’s, the high rise buildings were where people wanted to work. Those high rise buildings consisted of a grand lobby, a city view, water views and maybe a modest conference room and a gym and, if you were lucky, maybe a café that served coffee,” Gonor said.
Tenants were money managers, banking firms and insurance companies “that were really looking for that prestige.”
That model has been turned on its head, a change that has been hastened by the pandemic.
“The demand shifted from traditional office to creative office. That meant open plans, exposed ceilings, lots of amenities, lots of perks,” Gonor said, adding that the trend is moving toward low rise buildings with large floor plants that offer meeting spaces, outdoor spaces.
‘Now we’re really focused on retention. People are looking for the premium experience. They want to be visually stimulated and receive a premium environment,” Gonor said.”
Tenants are looking for what Gonor said was “an adult playground” in the workplace.
Buildings such as Paladion, 2100 Kettner and Horton Plaza are good examples.
Satellite Offices
Emily Watkins, senior principal and global head of enterprise for Unispace, said that tenants are taking a new look at downtowns generally after some left central business districts at the start of the pandemic.
“They can take advantage of all the amenities that cities have to offer,” said Watkins, who is based in Unispace’s San Diego offices in Del Mar Heights. The company is an international workplace strategy, design and construction firm based in Australia.
“We probably had less of the downturn because we’re such a destination city,” Watkins said.
Because San Diego is a destination city, Watkins said she is optimistic about the future of downtown.
“I think the growth is going to be in the concept of companies all over the U.S. wanting to have a satellite office in San Diego,” Watkins said. “Given the draw of downtown as such a great place to live, that’s going to attract companies that know their employees want to be there.
