SPECIAL REPORT: Commercial Real Estate

Suffolk Construction Company has moved its regional offices to downtown San Diego’s Little Italy in what is a lagging market for office space generally.

The move is seen as an encouraging sign by the Downtown San Diego Partnership in a market where retail continues to recover from the pandemic and several new apartment projects will soon open, including the Little Italy apartment tower Simone and the Radian in East Village, an apartment tower that includes downtown’s first Target department store.

“It’s a good sign. It’s one of the largest real estate construction companies in the country so they know the market, they know urban markets across the country and they chose to have their office in downtown,” said Betsy Brennan, president and CEO of the Downtown San Diego Partnership.

In the first quarter of 2023, downtown had the highest office vacancy rate in the county at 22% according to JLL, but Brennan is confident that the situation is temporary and fairly typical for most urban centers in the current economic environment.

“Downtown San Diego is a hub for forward-thinking, innovative businesses, because employees are seeking highly amenitized spaces, they’re seeking walkability and they’re seeking the kind of energy that downtown has,” Brennan said. “It’s spring, it’s exciting in downtown San Diego. The Padres are back. The conventions are back. There’s energy on our streets. That’s what employees want to be around.”

For the past 11 years, Suffolk had been leasing an office of about 6,500 square feet in Mission Valley for its more than 85 San Diego employees but the company earlier this year moved into a 10,000-square-foot suite of offices at 1420 Kettner Blvd. at the corner of Kettner Boulevard and Ash Street.

“I don’t think we could have found a better building to align with what we wanted to offer our employees,” said Zach Hammond, general manager of Suffolk San Diego.

“You have the amenity of Little Italy itself, which is great for our employees,” Hammond said.

Suffolk chose downtown after surveying office space throughout San Diego County because it was within an easy commute for its workers and centrally located for easy access to Suffolk projects throughout the region.

“The downtown location to me offers your employees the easier way to get to work, the most fun you could provide your employees at work, and you’re at the epicenter of the county, not far from National City, not far from North County, UTC, or life science of SDSU (San Diego State University). Everything’s within a stone’s throw away.”

The building itself also has coworking space should Suffolk temporarily need more room.

Suffolk’s new offices include a dedicated space with visual displays, including a live jobsite feed and what the company calls a virtual realty cave for visualizing and reviewing projects in 3D.

As a member of the Downtown Partnership and the San Diego Regional Chamber of Commerce Board of Directors, Hammond is a strong believer in downtown.

“Downtown San Diego to me is a fantastic place,” Hammond said. “One of the biggest drivers for the downtown market is what happens with in-person office over the next couple of years and who is going to be in the 2 million square feet that’s coming on board between IQHQ and Horton Plaza.”

Steady Pace

Like Hammond, Mike Berryhill, vice president and division manager of Swinerton construction, said that IQHQ’s bayfront development and the redevelopment of Horton Plaza by Stockdale Capital Partners are key to the immediate future for downtown.

“If those two projects lease up like everyone hopes they will, that will bring a lot of professionals to downtown and those professionals will want nice housing,” Berryhill said.

Overall, Berryhill is optimistic about downtown and San Diego County in general.

“The market is still, I wouldn’t say hot, but it’s definitely progressing,” Berryhill said, adding that Swinerton is hoping to break ground on several projects within the next 12 to 16 months.

“The demand is still strong but the financial portion with the interest rate increases, and the financial markets have made that a little tricky,” Berryhill said. “As we see it today, we hope we can continue at a steady pace. I wouldn’t say it’s hot or aggressive, but I would say steady. Unless something catastrophic happens, we think things can remain steady.”

Swinerton is the general contractor on three significant downtown residential projects – Simone and the Radian that are finishing up and The Lindley, which is in the early stages of construction.

The 22-story Radian, being developed by Cistera at 659 Ninth Ave., will have 241 apartments built around a preserved historic building – the Farkas Store Fixtures Building.

“That one, you can actually see down the street into Petco Park, which is pretty cool,” Berryhill said.

The new apartment tower rises from inside the two-story historic building, which had to be propped up during construction.

“It’s really neat now with the historical façade in place,” Berryhill said. “There’s only been a couple of those done downtown that had a historical façade like that.”

Although not as challenging from a construction standpoint, Simone, developed by Trammel Crow Residential’s Southern California Division at 1401 Union St., Simone at 36 stories with 395 apartments, will be the tallest tower in Little Italy.

Strong Fundamentals

Residential projects like those built by Swinerton have been leasing up quickly, according to Rachel Parsons, senior managing director at Berkadia.

“A lot of the tenants downtown are people who are moving into San Diego for the first time and they want to be downtown because it’s the entertainment capital of San Diego County,” Parsons said, adding that occupancy has been running at 94%.

“Over the past year, starting in summertime last year, we’ve had sort of a solid run,” Parsons said. “You’re not seeing the double digit rent growth that you saw in 2021 or early 2022, but you’re still seeing positive tradeoffs. We’re still seeing rent growth. We’re still seeing a lot of demand downtown.”

Starting construction on new projects has been challenging downtown, just like everywhere else, because of financial constraints.

Even so, Darcy Miramontes, Southern California Multi-housing Capital Market managing director of JLL, said that the market has slowed, “but deals are still getting done, deals are getting financed and built.”

“It’s just more difficult,” Miramontes said. “There are eight projects that have come out of the ground (downtown) or are planning to come out of the ground this year. Not all will be completed this year.”

Miramontes said that construction activity downtown is “a bit muted” compared to the past five or six years.

“If you look at the total pipeline, this is downtown, there are 35 (multi-family) projects in any phase of development, ranging from under construction to proposed to planned,” Miramontes said.

In part because of financing, those that are in the early planning or proposed stages are iffy, meaning they may get financing or not, they may even change from multi-family to something else.

“The construction market will slow down, but not forever. When it picks up is anybody’s guess. It depends on additional action by the feds and how inflation is going,” Miramontes said. “San Diego fares better than a lot of the major markets around the U.S., because our apartment fundamentals are still very good. We don’t have a lot of delinquencies. We have population growth.”

Padres Help

On the retail side, Serena Patterson, principal of Urban Property Group, said, “There’s still a pretty solid amount of retail activity.”

She said that she’s received multiple offers to lease retail space on 5th Avenue downtown.

“We’re just seeing an uptick in overall activity,” Patterson said, adding that demand for retail space downtown has been strongest in the Gaslamp Quarter and around Petco Park.

“The Padres and the excitement coming off the last season has definitely been a boost for downtown,” Patterson said. “Neighboring markets are still coming back.”