San Diego Union-Tribune (Sunday)
WILL THE BOOM BUST?
Even as vacancy rates climb, downtown San Diego construction continues at a furious pace with 14 active projects
As vacancy rates climb, downtown building goes on at a furious pace with 14 active projects.
“These projects took a long time to get to the construction phase. Several years. No one could have predicted COVID.” Gary London • real estate analyst
Downtown’s largest-ever residential project at 702 Broadway (above) is set to have 620 apartments over two towers. It is likely to be completed around March or April.
Logic dictates construction during a global pandemic would halt. But, the economic effects of COVID-19 are anything but logical. The transformation of downtown San Diego’s skyline has continued at a furious pace throughout the crisis, so much so that a visit to some parts can feel like you accidentally walked into a massive construction zone.
There are 14 active projects that total 3,301 new apartments, 93,000-square-feet of retail space and 815,000-squarefeet of office space, said the city of San Diego’s Urban Division. It is all going up as apartment and office vacancy rates climb.
Some reasons for continued construction are straightforward: After years of getting approvals and financing it is not like developers can just give up — Even though it is not unheard of in American cities for a builder to walk away from projects if things go wrong.
Another reason, that is less obvious, is builders are betting the virus will one day be gone and downtown San Diego’s post-great Recession transformation will continue.
“These projects took a long time to get to the construction phase. Several years,” real estate analyst Gary London said. “No one could have predicted COVID.”
From 2001 to 2019, downtown added 8,787 condos, 11,902 apartments, 1.2 million square feet of retail, 1.3 million square feet of office space and 5,627 hotel rooms. The bulk of that construction in the last few years has been residential.
London said it was expected the surge in residential building would eventually prompt companies to relocate, or open, downtown where there are a lot of available workers. That didn’t happen. But it doesn’t mean it isn’t possible — especially considering downtown is getting a surge of new office space.
He cites the Manchester Pacific Gateway project as a way downtown could transform. The already-approved 3-millionsquare-foot project takes up eight city blocks and calls for multiple office towers, including a 17-story, 372,000-square-foot Navy headquarters; a 1,100-room convention hotel; a retaillined “paseo;” and a museum on more than 12 acres south of Broadway between Pacific Highway and Harbor Drive.
But, London said downtown needs to create its own cluster of businesses, possibly biotech, that would attract a lot of workers and businesses looking for space outside of Sorrento Valley. He said a biotech company moving into the Gateway project could be a catalyst for transforming downtown.
He also cited other projects that, after COVID, could attract companies: The transformation of Horton Plaza mall into office space, an effort by the San Diego Padres to turn a Petco Park parking lot into a commercial office center, and a new Little Italy office building at 2100 Kettner Blvd. that takes up an entire city block.
“The saving grace for downtown can only be the fact it has a huge residential base now, and it’s getting bigger,” he said. “And there’s a perspective new cluster being seeded in the downtown markets.”
In May 2019, there were 76,228 workers downtown and 49,738 residents, said the San Diego Association of Governments. The number of workers there has likely decreased since the first stayat-home orders in March — especially considering food services was the biggest industry with 12,326 workers.
Vacancy rates have surged in recent months as offices have sent employees to work from home and many low-skill workers are unable to pay rent, or unwilling to sign a new lease. In mid-september, real estate tracker Costar said the downtown office vacancy rate was 19 percent and 15 percent for rentals.
However, the apartment vacancy rate can differ depending on where one lives downtown. The East Village rate in mid-september was 21 percent but was 8.1 percent in Little Italy.
Some builders are bullish that the whole work-from-home thing will be over in the near future and companies will be eager to return downtown. Paul Lebeau, principal of developer Lebeau Realty & Associates, said his company was eagerly pushing ahead with its six-story office building Twenty by Six on B Street.
“Some people think people will work from home forever. I just don’t think that will be the case,” he told The San Diego Union-tribune in mid-september.
Nat Bosa, one of downtown’s biggest residential developers, said Thursday he was gearing up for a major recession back in March — hesitant to have any blind optimism that the crisis would be over soon.
What he said he didn’t anticipate was the U.S. passing a $2 trillion economic stimulus package, the government’s biggest in history. He said that has kept the economy, and his business, going.
“The government decided to print money in overdrive,” he said. “It’s only because of that the Great Recession is not here right now.”
Bosa’s company has been constructing downtown’s largest-ever residential tower for several years. The 702 Broadway building is set to have 620 apartments over two towers. It is likely to be completed around March or April.
While his company had to stop production on some projects in Seattle and Bellevue, Wash., because of COVID closures, its San Diego project never missed a day.
Bosa won’t give a prediction that everything will be OK when 702 Broadway opens — insisting he simply has no idea what is next with the pandemic. However, he must have a glint of hope because he is in early planning for a new condo building and new apartment complex. He said it was too soon to give details.
“We are moving ahead,” he said. “Getting ready and being cautious. Still, it is hard to say when to pull the trigger.”
But what about future projects? A lot of what is being built right now has been planned for years and hard to turn around. It might be reasonable to assume developers would hold off on paying their architects for a while. But, the city still has new applications coming in.
One of those projects is 929 W Grape St., a 12-story residential tower with 49 apartments and 51 parking spaces that is nearing final approval by the city. The project takes the place of a vacant hotel and will likely become one of the first buildings many people see entering downtown near Little Italy.
In fact, there are six more downtown projects pending approval totaling 385 condos, 1,544 apartments and 43,000-square-feet of retail.
Even if none of those projects are approved, or developers decide not to follow through, it is unlikely downtown would not have some building in the years to come. There are 33 approved projects that haven’t started construction yet totaling 705 condos, 4,513 apartments, 538,000-square feet of retail and 1.2 million-square-feet of office.