Developers Discuss Downtown San Diego’s Evolution And Future Potential

It has been 20 years since San Diego implemented regulatory policies aimed at jump-starting redevelopment in downtown. These policies streamlined the entitlement process and brought about the first wave of downtown development, laying the foundation for a 24-7 live/work/play environment that continues to fuel downtown's evolution.

“The Downtown Development Plan, mated with a Master Environmental Review, covered all of downtown and provided a sort of road map for developers that invest in really large projects and some certainty around getting them approved,” said Wood Partners VP Will Winkenhofer (left). He spoke about the surge in downtown development at Bisnow’s Urbanization & Future of Downtown San Diego event last week.

He said Petco Park drove change in East Village. “If you look at East Village 10 years ago and today, it’s a night-and-day difference.” Canadian Bosa Enterprise Corp, which has built lots of condos downtown, spurred residential development, Winkenhofer said. “Bosa made a huge bet on San Diego, I think because it looks a lot like Vancouver — a beautiful waterfront, great weather and a coastal environment that just needed a supercharge. That’s what Bosa provided, and why residential is flourishing in downtown today."

Robert Green Co CEO Robert Green will open the new Pendry San Diego in the Gaslamp Quarter later this month and has another huge project planned for the waterfront. He said the surge in hotel development stems from the strong economy, buoyed by the tremendous amount of wealth that’s been created since the recession, idle capital that needed to be placed, and the ongoing advancement of the stock market.

People have more disposable income, he said. “That, coupled with the Baby Boom generation coming to the realization that living in an urban setting is pretty fun, as well as the Millennials wanting to be in an exciting, stimulating environment where there are things to do, has stimulated development in downtown."

Green said the world is becoming more aware of San Diego, as evidenced by British Airways and Japan Airlines establishing regular service to San Diego’s airport. He said foreign investors are beginning to look at San Diego, too. The convention center continues to fuel the hospitality market, and the airport had more inbound flights last year than any time in the past. “All those things, from a hospitality perspective, have really benefited us.”

Hensel Phelps development manager Alex Guyott, whose company recently completed construction of Portman Holdings’ BRIC 1, a dual-branded Marriott International Springhill Suites and Residence Inn on the waterfront, said the hotel boom is a result of capital becoming available for hotel development after the recession. Even with hotel growth over the last few years, he believes there’s still room for more, especially with the evolution of select-service hotels, which are less costly and easier to build and finance than full-service hotels.

Moderator Gordon Kovtun (left), a principal at KCM Group, asked panelists about the target demographic for their projects and how it may change over time.

“We build for Millennials, and we build for the cycle, but our projects are good for 50 to 100 years, so we have to think beyond today. We think we’ve got 15 years of this Millennial impact," Winkenhofer said. He said there are five to seven more years before all Millennials leave school and enter the workforce, then another eight years before they take that next step to marriage and children and move to suburbia.

Winkenhofer said his projects are putting in infrastructure that meets the needs of Gen-Xers working from home or in a nontraditional environment, where they need access to the internet, an airport or other transportation. He said The Rey, his company’s first downtown San Diego project, provides WiFi and co-working space, as well as quiet spaces.

He said his company is looking at building large three-bedroom units to meet the needs of Generation Xers with families and empty nesters who are trading suburbia for an urban lifestyle, but need extra room for grown children and grandchildren to visit. Winkenhofer said these projects would also serve Millennals. “It will be hard to keep Millennials in downtown as they start families, if all you have to offer them is 650 SF units,” he said.

Green said the Pendry is targeting Millennials and Gen X by focusing on art and music and providing amenities and public spaces for socializing. Besides five food and beverage amenities on the ground level, the Pendry has a rooftop gathering space that includes a bar and restaurant, a pool, a spa and a large fitness facility. He said the other project, Fifth Avenue Landing, is a convention center hotel that will connect via a bridge to the San Diego Convention Center.

Portman’s new hotel is the first phase of BRIC, with BRIC 2 bringing a five-star InterContinental Hotel to the downtown waterfront, Guyott said. He said these projects are part of the Port of San Diego’s North Embarcadero Vision Plan, and BRIC is the first chapter in creating an exciting destination that optimizes public access to the waterfront. BRIC includes a park on the site of Lane Field, the Padres original ballpark and 25k SF of retail amenities along a promenade on the waterfront that will appeal to locals and visitors.

Kovtun asked the developers if they think downtown San Diego’s hotel market is overbuilt. “I know it looks like a lot of hotel development, but no hotels have been built in more than a decade,” Green said, adding hotels developed in this cycle will only increase supply by 2%. “We’re seeing ongoing strong occupancy rates, strong growth in RevPAR. For us it’s a matter of location. If it’s the right location, then catalysts like the ballpark and convention center and all the great restaurants and entertainment in downtown, then there’s still room for growth.”

Green said capital markets dictate how fast we grow. “In the last eight months, we’ve seen a shift in their appetite for financing hotels, so I think that’s going to self-regulate on the capital side.” Guyott agreed, saying the banks are the biggest challenge to building hotels right now. “Banks are getting pretty skittish, but there is still capital available."

Winkenhofer said apartment developers are also seeing a pullback in the debt market. He said his company had been looking at 65% loan-to-cost, but now is in the 50% range. “With the cost to build here in San Diego, that leaves us with 50% equity to fill. While there’s still a good amount of equity out there for projects, the economics lenders are trying to achieve makes it hard at this debt level.”

Similar to hotels, he said no apartments were developed for five years, so a rebound to the number of units coming online in ’16, ’17 and ’18 was expected. “What’s important to note is where they’re located," he said, as there are pockets in San Diego that are starting to feel overbuilt.

Winkenhofer said the other important thing to look for is a balance in jobs and beds. “There needs to be a strong job market within a 10-mile ring of downtown,” he said. Right now there are about 80,000 employers in downtown and 35,000 to 40,000 residential units, a 2:1 ratio.

Kovtun asked panelists to describe the differences in developing on the waterfront and downtown.

Guyott cited differences in development criteria. He said developing on port land, as well as in a coastal zone, is always subject to a ground lease, which involves different criteria for underwriting. The Coastal Commission controls the entitlement process, rather than Civic San Diego, so developers have to obtain a coastal development permit. In the case of BRIC, both the Port and Coastal have jurisdiction, but permits were obtained through the city planning department, because the Port doesn’t have the resources to review plans, Guyott said.

“You’re limited to what types of projects can be built on the water," he said. "You can’t do office unless it’s maritime-serving, retail has to appeal to visitors — you can’t put a Von's on port land."

Green said the port is incentivized to generate revenue, so it can invest in other projects on the public side, which creates an interesting dynamic. The Coastal Commission is the big differentiator. “The Landing, for instance, is the first to provide an affordable lodging component, not only to accommodate what the Coastal Commission and Port wants for our particular project, but additional affordable lodging that could be used as a mitigation bank, in which developers could use our project to meet their entitlement process goals, as well, ” he said.

Green said his project provides a lot of public access, a public plaza, programming and physical ways to get people to utilize the waterfront, come down to the waterfront and dine and shop. There’s a mandate for that by both the Port and Coastal Commission; he said they favor projects designed to get people down to the waterfront.

Kovtun asked the panelists what their vision of downtown San Diego is in 20 years. “I think we saw San Diego 1.0 in the last cycle — the ballpark, Petco. We already had a great tourism industry, but hotels, amenities and Horton Plaza all came together," Winkenhofer said. "I think we’re at 2.0 now. We’re seeing multifamily that meets a necessary demographic, fantastic new hospitality projects and an improving retail environment."

Looking ahead 20 years is downtown San Diego 3.0, he said. "I think San Diego needs to cultivate industries where it already has an advantage — biotech, clean tech, defense," he said, emphasizing the city should focus on incubating an industry, not worry about luring Fortune 500 companies downtown.

Green thinks San Diego can do both. “San Diego has all the makings of a world-class city,” he said. “And I hope we’ll be our own best cheerleaders. It seems there’s so many people in the world that would love to live in a place like this, work in a place like this."

“We just need to be imaginative and focus on better mass transit. We need to be a lot bolder about our vision of what downtown can be,” Green said.

Guyott said for too long we’ve depended on attractions like SeaWorld and the zoo to bring tourists to San Diego, but the port’s revitalization plan will provide a much broader attraction and boost tourism.