Development's A Hard Slog In San Diego, But Developers Still Fighting The Good Fight To Build

California is a notoriously tough place to be a developer or construction company, yet the opportunities are still so great that the industry presses on through the high costs, strident opposition to growth and miles of red tape, according to the speakers at Bisnow's San Diego Construction & Development event.

Despite the challenges for development in California, there is a future for the industry in the state, the Cities of the Future panelists said. Advancing technology is going to help designers and developers make more informed decisions about what developments should be like and where they will be — tech already has a significant influence on the design process. 

One example is 3D presentations of space designs, which are taking the place of standard two-dimensional drawings, the speakers said. The earlier that tech is used in the design process, the fewer iterations of the space will be necessary, because visualizing the space is much easier.

Construction sites themselves are changing because of advancing technology. Paper is nearly gone, but the really disruptive tech is building information modeling and prefabricated building elements. Leveraging this tech will result in major savings for developers and contractors as job sites become more efficient.

The importance of prefabricated building elements will probably grow in the future, but it has been a long time coming and there are still challenges. For one thing, prefabrication means that developers need to lock in a project's systems and design early, to get the full benefits. That can be at odds with a project that needs more flexibility as it is developed.

There is also still a lack of standardization when it comes to prefabricated elements. If you pick the wrong company in the beginning, the speakers said, there can be delivery issues, or worst-case, if the company goes out of business, a development can't simply pick up mid-project with a new provider. It has to go back to square one.

Overall, there is still a fair amount of uncertainty when it comes to integrating technology into the built environment, the speakers said. One reason is simple resistance to change — innovation and construction often don't go in the same sentence, one panelist quipped.

Regulatory change will be slow. Municipalities don't always know yet how to deal with new construction techniques. Building codes tend to lag. 

Driverless cars and other automation will be major disrupters in the way space is designed in the future, and in the urban fabric, though the timetable of the transition to this kind of more automated infrastructure is still unclear, the speakers said.

How people will interact with deeper forms of automation is also uncertain, but that kind of automation is coming, and developers and designers need to be ready.

Automation in industrial space is already very far advanced, and distribution centers without workers is nearly a thing, speakers said. Advances toward that kind of property will mean changes for the design, such as allowing for more vertical distribution centers. That will mean that some formerly obsolete industrial properties in strong last-mile locations will be able to be redeveloped.

The Entitlement to Ribbon Cutting panelists said development can be tough in California in general, but some areas and municipalities are more open to development that others.

"We focus on areas that are receptive to development, such as Oceanside, Carlsbad and San Marcos — all of those are quite positive," Ryan Cos. Western Region President Chris Wood said.

"South County has been somewhat overlooked," HomeFed Corp. Senior Development Manager Kent Aden said. "Chula Vista, for instance, has done a great job of creating a business-friendly environment. There's over 6M SF of commercial sites entitled there, and over 20,000 homes left to build there, so I believe over the next decades, Chula Vista will attract more business."

"I really enjoy working in the Downtown San Diego environment," Cisterra Development principal Jason Wood said. "And working with the folks at Civic San Diego. Downtown has its challenges, of course, but having a group like that helping you is a huge advantage in getting projects done, especially when compared with other parts of California."

The speakers said much-needed reform of the California Environmental Quality Act isn't politically likely anytime soon. The impetus for important changes to the law, which has been weaponized as a way to slow down or stop development, is going to have to come from the environmental community, whose goals aren't being furthered by misuse of the law, the speakers said.

"Most people might not be aware that you can file a CEQA lawsuit anonymously and for little money," Aden said. "That is at the heart of shutting down projects for years. It's a nightmare, but it is a nightmare that you can wake up from — if you can budget the time and the money for the delay."

In the current financing environment, all projects are now more expensive and take longer, Chris Wood said.

"You need institutional capital to bankroll you with equity and debt. In my world, institutional equity won't take entitlement risk, so you're not closing escrow until everything is in place."

Aden said his company is on the higher-risk side of the business, buying unentitled land and sometimes sticking it out for years before approvals can be obtained. "Almost by necessity, we're self-financed," he said. 

"In the last year or so, we've been successful in the EB-5 market, and have raised about $100M from overseas," Aden said. "Even though interest from China has slowed, we're seeing a lot of interest from South Korea, Vietnam and now Brazil."

The case study speakers discussed the 7th & Market project, which has been in the works for a few years, and lately gummed up by legal challenges. Those difficulties, according to Jason Wood, are nearly over. Plans for the project include San Diego's first Ritz-Carlton, along with office and retail, and both rental and for-sale residential space.

"We spent 2017 fighting a CEQA lawsuit, which we won," Wood said. "The plaintiffs appealed, and now we're negotiating with them. We're very close to having the lawsuit dropped, and we've returned to the capital markets to get our financing back in order. It looks like the project is a go again."

The Ritz-Carlton project is on a full block Downtown on a site owned by the city of San Diego. In 2015, Wood said, the city selected Cisterra to develop the project.

"There were certain things the city wanted, such as 200 public parking and 200 resident units and 50K SF of commercial space," Wood said. "We decided that we wanted to deliver a project that not only meet those requirements, but exceeded them. We decided to do top-notch."

Part of the early process was approaching Marriott and proposing a Ritz-Carlton, since there were hotels of that brand in San Diego, as well as Whole Foods, though the grocer has since pulled out of the project.

Carrier Johnson + Culture principal and architect Claudia Escala said the design of the project involved a program-based strategy.

"How could we stack the different uses? We have a six-story podium that will fit into the local context, and so will the 19-story office tower," she said. 

"In the higher portion of the tower, we started with the apartments, and those led to the hotel and the condos," Escala said. "Those uses stack really well. It will be a stacked tower, a vertical city concept."

The project also has a surprising 56K SF of open space. Escala said Carrier Johnson could do that because of the terraces integral to the design of the stacked tower and the public plaza on the ground level.

Suffolk Construction President and General Manager, West Region Mark DiNapoli said the best way his company added value to the project at this stage was by putting together a highly reliable budget.

"It's a complex project, really a blended use, not mixed-use, because all of the elements work together," DiNapoli said. "We tapped the expertise of the design-build subcontractor community to help put cost perimeters around the project's various systems. We priced the design intent — which means we filled in all the blanks."

The residential component was the toughest aspect of the project, DiNapoli said. "We took images from projects around the country that we were building, or had built, and we schematically designed, for ourselves, what a residence here would look like."