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Next Hurdle for Mixed-Use Development: Put San Diego Suburb on Tech Firms’ Radar

Passed Over by Amazon, Millenia Developers Look to Fill South County Office Niche

CoStar: Completed elements at the mixed-use Millenia in Chula Vista include apartments, retail and an Ayres hotel, with construction of an office campus set to begin by early 2020. (Meridian Development)

Developers have completed $670 million worth of apartments, retail and a hotel at master-planned community Millenia in Chula Vista, California, but now comes the next big challenge: bringing in tenants for the project’s planned 28-acre office development billed as the first large-scale high-quality office campus in the San Diego region’s second-largest city.

The South County site was among four put forward in the region's unsuccessful bid to land e-commerce titan Amazon's second headquarters, but developers see the project as Chula Vista’s chance to partake in a recent steady influx of technology-oriented office tenants recently arriving in central San Diego neighborhoods like University Town Center and Sorrento Mesa, and busy North County cities led by Carlsbad.

Guy Asaro, chief executive at San Diego-based Meridian Development, the master developer at Millenia working with other developers to place various elements at the 210-acre community, said eastern Chula Vista has been evolving in recent years beyond its status as a bedroom community for those seeking relatively affordable housing compared with other San Diego enclaves, but still willing to commute northward to their jobs.

With several mixed-use elements in place at Millennia, the city could be poised to add jobs in the same development, to serve thousands of new residents who have located in Chula Vista over the past 20 years, but now want to work closer to home. It could help follow through on a long-time goal of regional planners to have people living and working in self-contained, pedestrian-oriented developments that help keep cars off congested roads.

"For a long time, you’ve had this highly educated workforce living in Chula Vista, and you’ve had some good upscale housing in place, but everybody was driving north to work," Asaro told CoStar News. "Now it’s not a matter of if that’s going to change, but when."

Local developer Chesnut Properties is planning a multi-phase, $500 million office campus at Millenia that is expected to span 1.4 million square feet. The developer is counting on technology and other growth-sector tenants to seek new office space close to workers who have already rented or purchased homes elsewhere within and near the mixed-used development.

Company Principal Lee Chesnut said the first seven-acre creative-office phase, a campus called Think, is set to start construction sometime between mid-November and mid-February, with financing currently being finalized for two, four-story buildings totaling 324,000 square feet with an adjacent fitness center and café. The project is targeted for a May 2021 completion. Lease rates have not been set.

"I believe that the first building is timed just right to bring to the market," Chesnut said. "It’s technically a spec building, meaning I don’t have firm commitments from tenants, but we have enough feedback from some prospects from different kinds of uses, that I believe we’re doing the right thing for South County."

Cindy Gompper-Graves, chief executive of the South County Economic Development Council, previously told CoStar News that office projects like the one at Millenia could help the Chula Vista area bring in corporate headquarters, currently scarce in that area, and also host educational campuses and companies involved in cross-border and other international business operations.

Pricing as 'Sweet Spot'

It remains to be seen whether the South County office offerings at Millenia will draw technology and other tenants who have traditionally favored central and northern locations within the region, according to CoStar Managing Analyst Joshua Ohl. But the Chula Vista project also has a chance to counter the city’s long-time status as a hub for mostly older, staid office properties, while remaining relatively more affordable than popular and pricey markets to the north, such as Carmel Valley and University Town Center.

Local brokers have noted, for instance, that monthly office rents at developer Kilroy Realty’s still-to-be-completed One Paseo mixed-use project in Carmel Valley are already approaching $6 per square foot. CoStar data shows the average office rent in Carmel Valley at $4 per square foot, and in UTC it’s at $3.57.

Meanwhile, Chula Vista offices are currently leasing at an average of $2.51 per square foot, compared with the San Diego regional average of $2.76, according to CoStar.

"Pricing is probably going to be their sweet spot," Ohl said of Millenia’s upcoming offices. "Their best bet is probably going to be to offer space at a price that the market hasn’t seen for that kind of new product." One caveat, he noted, is that new Chula Vista offices will also be competing with other more central enclaves, like downtown San Diego, where offerings and pricing could be similar to those at Millenia.

If high-tech tenants don’t come, Ohl noted Millenia may have opportunities to snag tenants in the still-growing healthcare field. Sharp Healthcare and other regional medical providers in recent years have been boosting their South County office presence to be closer to a rising number of residents locating in new residential developments throughout Chula Vista.

CoStar data shows Chula Vista’s average monthly apartment rent at $1,692, slightly lower than the $1,857 for the overall San Diego region, according to CoStar. Ohl said indicators of residential demand at Millenia appear strong so far, with completed apartments recently leasing at a rate of around 17 units per month. That’s not far off from popular San Diego neighborhoods like Mission Valley, where new apartments have previously leased up at a rate of around 22 units per month.

Apart from the coming office project, other Millenia elements include a recently completed, 135-room Ayres Hotel; and two nearly complete retail projects by local developer Sudberry Properties, where 85% of tenants are now open for business. Millenia Place’s roster includes HomeGoods, Cost Plus World Market, Ross Dress for Less,

McDonald’s and the region’s first drive-through Jamba Juice; while the food-centric Millenia Commons has several eateries set to open this fall.

The most recently completed apartment complex, developer Trammell Crow’s 309-unit Alexan Millenia, also has 6,600 square feet of retail and several live-work units, allowing for residents to conduct commercial business, developers said.

Asaro said the total of nearly 800 apartments completed at the 210-acre Millennia over the last three years are now 95% occupied. Apartment and retail lease-ups, along with steady sales within the development’s eight for-sale housing neighborhoods, have encouraged the master developer to move ahead with the next $285 million phase of development.

That is planned to include 253 apartments, 335 attached homes, a fire station, two parks and other civic spaces, for which Meridian has contracted with multiple other partner developers.

CoStar: The next planned element at Millenia is a multi-phase creative office development, starting with a campus called Think. (Chesnut Properties)

Article by: Lou Hirsch, October 03, 2019 | CoStar

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