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Downtown is Growing Up

by Ray Huard

San Diego Business Journal

April 15, 2024

SAN DIEGO – Downtown San Diego is going through a transition coming out of a post-COVID period when high interest rates put a damper on new construction.

Demand for downtown office space is weak, with vacancy rates the highest in San Diego County at 27.1 % in the first quarter of 2024, according to Cushman & Wakefield.

At the same time, demand for retail space is strong and the completion of three major downtown projects portends a bright future.

Long term, several experts said that San Diego’s urban core is performing far better than many other cities.

“I think downtown is finally growing up,” said David McCullough, principal landscape architect at McCullough Landscape Architecture and a board member of the San Diego Architectural Foundation.

“We had a juvenile downtown for many years now. It just went through its teens and it’s going into its maturity,” McCullough said. “We’re going to see our city turn into what I would call a 24-hours city, which is what really needs to happen.”

McCullough said that, “San Diego is setting a standard across the country for how a city can do it right,” citing zoning changes that make it easier to develop in neighborhoods near transit.

“We’re going to see a lot of money and developers start to focus here in this region. I really believe that,” McCullough said.

Alberto Lopez, project manager of Project Management Advisors, said that, “San Diego is poised to grow, particularly in the residential market.”

“We’re going to continue to see a lot of residential high rise come in,” Lopez said.

Most of the downtown apartment towers have been luxury apartments, but Lopez said that a 40-story East Village apartment building, Revel, planned by Cresleigh Development, could be a model for future middle-income housing downtown.

“I’m hoping that developers will see that and get ambitious to do the same thing that they are doing and try to target middle market that is missing today,” Lopez said.

Retail Brings Leasing Successes

Key downtown projects due for completion in the second quarter of 2024 include the Campus at Horton, the former Horton Plaza mall redeveloped by Stockdale Capital Partners; West, a mixed-use tower of apartments and commercial space built by Holland Partners and Lowe on the former site of the San Diego County Superior Court; and RaDD, IQHQ’s waterfront development.

“The retail components of all three of these projects is having early success with multiple leases signed and preleasing,” said Derek Hulse, executive director of Cushman & Wakefield in San Diego.

Collectively, those three projects will deliver nearly 2.4 million square feet of office and life science space downtown, according to Hulse.

“All three of these projects have the hope/promise of attracting new industries, particularly tech and life science, to the downtown submarket,” Hulse said. “While it will take several years for all of this new space, office and life science to be leased, the development and delivery of these projects is needed to attract new companies and industries.”

Richard Gonor, an executive vice president of JLL, who is handling commercial leasing at West, said that 30% of the commercial space has been leased with SANDAG (San Diego Association of Governments), taking 87,000 square feet of office space in the 37-story building.

“We’ve got a handful of other leases that we’re close to signing for additional office tenants that will be moving in later this year,” Gonor said.

With its mix of office, residential and retail, West “seems to be the future of what’s working downtown,” Gonor said.

With more and more people living downtown, Gonor said that “the workforce wants to be downtown. They don’t want to drive up to Sorrento Mesa or wherever.”

Among downtown projects still under construction, Toll Brothers recently topped off The Lindley, a 37-story apartment tower at the edge of Little Italy with 363 apartments and 12,247-square-feet of retail space.

Toll Brothers expects to start leasing apartments in the fourth quarter of this year but has yet to set monthly rental rates.

“The downtown San Diego apartment market has remained strong over the past year and is expected to remain so over the next few years,” said Andrea Meck of Toll Brothers.

Meck said that Toll Brothers has just started marketing retail space in The Lindley.“We have received interest from a broad range of retail tenants,” Meck said.

Conversions Part of Office Space ‘Reset’

Tyler Hanson, first vice president of Kidder Mathews in San Diego, said that downtown will continue to struggle until the city gets a handle on homelessness and the perception that parts of downtown are unsafe.

“As soon as that gets cleaned up, I think the market is going to do a lot better,” Hanson said. “San Diego is still one of the best cities. People want to be down there.”

Downtown “will come back and be a very cool place again,” Hanson said. “It’s just a mater of time.”

A project cited by Hanson as a likely model for future downtown development is the planned conversion of Tower 180.

J Street Properties earlier this year acquired a 25-story office building with an eight-story annex at 180 Broadway with plans to turn it into a mix of apartments and hotel rooms.

“That’s probably going to continue to happen where it can,” Hanson said.

McCullough and Gonor said that downtown office space will likely be converted to non-traditional uses.

“If we think more about diversity of use, there’s huge potentials there, and I don’t know what they are yet, but there’s a huge need for manufacturing and distribution in San Diego,” McCullough said. “I know upper levels become really difficult for that, but the floor plates for office buildings are perfect, so if we could figure out the elevation factor, then I think there might be something there.”

Lopez said that another example could be converting some office space to self-storage.

“A lot of the newer residential towers that you see downtown have such small storage spaces,” Lopez said. “I could see that being very attractive to prospective residents that want to move downtown.”

Gonor said that downtown San Diego is “in the middle of what they call the great reset as it relates to commercial office buildings.”

“I think it creates and opportunity for developers to think beyond the standard box and create something for this city that maybe exists in other cities that we haven’t brought into our downtown market.”

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