Why Firms Hesitate to Embrace Downtown SD

Knudson: “Between the years 2000 and 2010, Downtown San Diego’s residential population grew faster than every major city besides New York City and Chicago.”

SAN DIEGO—The perception of a lack of parking in Downtown San Diego is one reason why residential growth is outpacing office growth in this thriving submarket, CBRE ‘s senior associate, tenant representation, Evan Knudson tells GlobeSt.com. Through census data, Knudson also discovered that office growth in suburban markets is outpacing office growth Downtown; residential construction this cycle is dominated by apartments , which means more full-time occupancy; Downtown office construction continues to lag behind, and it’s doubtful that developers will build spec; and yet, an influx of new residents will continue to demand additional workplaces Downtown. We spoke exclusively with Knudson, who actually lives, works and plays Downtown, about his findings and what they mean for Downtown San Diego office and multifamily growth. GlobeSt.com: Why is residential growth outpacing office growth in Downtown San Diego? Knudson: A significant portion of our residential growth downtown can be attributed to condo developer Nat Bosa , a Vancouver, Canadian native that saw a huge opportunity in our Downtown and took on the mantra, “If you build it, they will come.” Other condo and multifamily developers followed suit after seeing the success that he had Downtown. Helping with that success, especially recently, has been the “urban shift” among Millennials (which in 2015 became the largest generation in the US labor force). For office growth, I think local companies have been more hesitant to embrace the “urban shift” in San Diego because of the perception of a lack of parking Downtown. It’s a unique phenomenon that exists in very few large cities, where companies feel the need to provide parking for all of their employees. In Seattle, where I’m from, it’s extremely rare for a company to provide parking for their employees, and it’s understood that employees either need to pay for their own parking space or find alternative means of getting to the office. I’ve seen my clients wrestle with this, and many have decided to embrace this method with great results. In fact, one of my clients found out, more than half of their employees had moved within a one-mile radius of their new office when it was relocated downtown. GlobeSt.com:   Where does residential construction stand, and what is its impact? Knudson: This cycle, residential construction is dominated by apartments, which means more full-time residents. Last cycle (2001 to 2009) was dominated by condo developments, as 8,270 condos were delivered compared to 4,380 apartments. I’ve lived Downtown going on five years, and observationally, I’ve noticed that many of these condo units were left vacant much of the year (vacation/second homes, etc.). The tables have turned, and there have been 4,953 residential units built or under construction compared with only 232 condo units. Considering that the multifamily vacancy rate in San Diego traditionally hovers around 3% to 4%, it’s a safe bet that most of these apartment units will be occupied the majority of the time, and most likely by Millennials. GlobeSt.com: Do you feel there is a demand for office space Downtown? If so, which locations are in high demand, and what are users seeking? Knudson: There has been incredible demand for unique, high-quality environments and spaces Downtown, and users are willing to pay top dollar because of the lack of these top-tier options. On the other side, the demand in commodity, more-traditional class-B space has been muted. Tenants are looking to use their office environment as a tool for employee recruitment and retention, and with more of their target job force living Downtown, it’s a no-brainer to locate near them if they can find great space. GlobeSt.com: Why won’t developers build spec office since the demand for workplaces Downtown is increasing? Knudson: In most cases, office rents Downtown haven’t appreciated enough to justify the cost of new construction. Developers have realized that they need to offer something that differentiates their product from the rest of the market to get a rent premium. This is why we will likely only see smaller “boutique” office buildings and mixed-use buildings with an office component build spec during this cycle. All signs are pointing to the 7th & Market site ( Cisterra ) to break ground in Q2 2016, with expected delivery in mid-2019, which will contain about 160,000 square feet of new office space. The other likely candidate to build spec is Block D at Maker’s Quarter , which will have about 50,000 square feet of office. It’s highly likely that any other office developments will require an anchor tenant to start construction. GlobeSt.com: What else should our readers know about office and residential development in Downtown San Diego? Knudson: There’s one Census stat that I’m blown away by: between the years 2000 and 2010, Downtown San Diego’s residential population grew faster than every major city besides New York City and Chicago. During that same time period, Downtown San Diego added over one million square feet of office space, which equates to about 3,000 jobs, or a ratio of about five residents per new office job. For comparison purposes, Chicago added about 44,000 residents and roughly 16 million square feet of office space, which equates to about 45,000 new office jobs, or a 1:1 ratio. Compared to the rest of the city of San Diego, Downtown’s population growth from 2000 to present represents about 13% of the total growth (about 21,000 of 160,000). However, Downtown’s office deliveries in that same time period represent only about 6% of the total City of San Diego numbers (about 1.2 million square feet vs. 20 million square feet). There is an influx of new residents that will continue to demand additional workplaces Downtown.