As federal and state lawmakers dispute about how to cut budgets, local landlords and brokers say they’re not immediately concerned that government downsizing moves will adversely impact demand for commercial office space in San Diego County.
“It’s something we’re keeping an eye on, but we’re not losing sleep over it,” said John Turner, a San Diego regional vice president with The Irvine Co., among the largest local office property owners, with 60 buildings encompassing 7.4 million square feet.
Turner said the bulk of Irvine’s downtown tenants are firms and agencies that deal with the state and federal courts, as well as the Internal Revenue Service. Generally, agencies related to security and law enforcement are not considered in danger of losing major funding at the federal level.
State and federal courthouse projects are under way in the downtown area, as court systems continue to boost infrastructure to handle rising caseloads. Turner said the federal government has already booked up about 90 percent of the space to be used by court-related agencies in the U.S. courthouse, set to open in 2013.
Drawing More Tenants
That suggests there may still be a need for other government agencies and related firms to find space in commercial buildings if they wish to be near the courthouse, Turner said.
He said Irvine Co. doesn’t have a significant quantity of downtown leases set to end in the next two to three years, the likely period when government budget cuts would begin taking effect. Even after state and federal lawmakers agree on specific operating costs, it could take several more years to see the full impact on commercial office real estate.
By that point, the local office market will likely have improved significantly along with the rest of the economy, Turner said.
Currently, the largest local government construction project is a six-building, 38-acre County Operations Center, being developed in San Diego’s Kearny Mesa area by Los Angeles-based Lowe Enterprises Real Estate Group.
Approximately 1,100 employees from nine San Diego County departments have relocated to the first two buildings since they were completed in fall 2010. Two buildings in the project’s second phase are set to be completed in 2012, with the final two buildings to be finished in 2014.
Mike McNerney, a senior vice president in Lowe’s San Diego office, said the county will be housing a total of about 4,000 in the complex when it’s completed, with most being relocated from other county-owned sites.
McNerney, whose firm develops government projects throughout the nation, said he doesn’t expect the county project to create a flood of open commercial office space in vacated locations. For instance, the county could decide to hold on to those buildings that it owns and put them to use for other government operations, or sell off some properties in a process that could play out over several years.
Renata Simril, southwest region managing director in the public institutions practice of brokerage firm Jones Lang LaSalle, noted that federal agencies such as the FBI are actually expanding in San Diego. In the long run, other departments tied to homeland security will also likely be expanding, which could counteract the effect of budget cuts made elsewhere.
“There will need to be some rethinking of real estate strategies, but it’s just too soon to know how that’s going to play out,” Simril said. “Private companies have already taken actions to streamline their office space requirements, but government is always a lagging indicator in terms of the economy.”
Andy La Dow, a principal with brokerage firm Cassidy Turley BRE Commercial in San Diego, noted that there is currently about 600,000 square feet of downtown office space, in which various government agencies will be making decisions in the next two to three years about whether to stay or go.
Steve Rosetta, executive managing director in the San Diego office of brokerage firm Cushman & Wakefield, said many government departments such as courts and social service agencies are actually looking to expand operations but waiting for past funding requests to be approved. The fate of those requests could also sway the local office market.