Why Redevelopment Of East Village Is So Important To Downtown San Diego’s Future

Once a deteriorating industrial neighborhood, downtown San Diego’s East Village is evolving into a hip, mixed-use, transit-oriented village, with a plethora of new development. This includes Petco Park, DiamondView Tower, Sempra Energy's new HQ, the new San Diego Central Library, and lots of residential and mixed-use projects.

Lowe Enterprises SVP Mike McNerney (above left) said the change has been dramatic in terms of competition for project sites. His company was early into this market — four years ago, Lowe’s was the only developer to respond to the city’s RFP for a site in the 93-acre I.D.E.A. District in upper East Village, where IDEA1 is rising. “Now there’s a significant amount of growth there — cranes are everywhere,” he said.

This 292-unit residential, mixed-use project, which includes 14k SF of office and retail, is a model and catalyst for other projects targeted at young entrepreneurs and other innovative and creative professionals.

Paragon co-founder Roberto Jinich (right), a retail investor, said the city requires developers to put retail on the bottom floor of East Village projects as an incentive to activate the street scene, but the critical mass needed to lure retailers into this area is not there. “As East Village has been evolving with all the residential construction going on there, we’re starting to see a more dynamic market for retail,” Jinich said. “But you can’t get ahead of yourself with retail or with residential. It’s a balancing act.”

McNerney said Civic San Diego provides developers a conditional-use permit for 10 years to delay the retail requirement. “You do a market study, then you can put alternative uses on the ground floor,” he said. “That’s one thing we did, because we’re in an emerging area of East Village. We designed the ground floor to be flexible space, so today it can be office and residential uses. The design is set up so it is easily adaptable to retail in 10 years, if that’s how long it takes.”

Given the significant construction of residential projects and influx of residents to downtown, moderator Matt Semic (left), a principal at Latitude 33 Planning and Engineering, asked panelists at Bisnow's Urbanization & Future of Downtown San Diego event how they see this impacting mixed-use development and some of the trends they expect to see.

“I think we’ll see more mixed-use,” said Reno Contracting founder/CEO Matt Reno. His company just completed the Vue on Fifth, a seven-story, 45-unit condo project in Bankers Hill, that includes retail space occupied by a day care and fitness center. “I think this lends very well to the downtown environment.”

McNerney mentioned two huge mixed-use projects coming to East Village, Cisterra Development’s $400M 7th & Market and Holland Partner’s $200M Park & Market. He gave Civic San Diego credit for applying criteria for developing these city-owned sites to activate streets by including office, retail amenities and parks. McNerney said the proposed UCSD satellite campus will occupy the entire 60k SF office component at Park & Market.

He said the biggest challenge in downtown is office rental rates, which are $3 to $3.50/SF. Over in East Village, the high-water mark is DiamondView Tower with rental rates in the $4 to $4.50 range, and that’s where rents need to be to support new development, McNerney said, adding Civic San Diego is providing a subsidy to projects to get more office space going in downtown.

“What we need to see is more businesses that want to locate in downtown and willing to pay market rates that it takes for new construction. We need to see high $3 and $4 rates, and once we see that other developers will do more office projects in downtown or mixed-use projects that includes office,” McNerney said.

From a retail perspective, Jinich said once there is a balance of office and residential, there will be a change in the type of retail downtown. “What’s there now is a lot of restaurants, bars and some services like health clubs, but we lack anchor tenants," he said. "You don’t see an Apple Store, the next level retail, or type of stores in Fashion Valley and UTC. I think we’ll get there eventually, but I don’t think there’s enough residents yet to support that.”

“I think it’s a matter of critical mass, it’s a very simple numbers game,” Jinich continued. "To support an Apple Store or other anchor tenant you need a certain number of people per square foot living downtown for them to even think about going there.

Panelists were optimistic about the current cycle.

Reno said that if you talked to people a year ago, they were looking for another recession to come around the corner. “I frankly don’t see it. Like or dislike how the election turned out, two things are going to happen. Our taxes are going to go down. We’ll go from one of the highest corporate taxes in the world, to one of the lowest. Two, there’s going to be substantially less [regulation] — Dodd-Frank out the window. This will bode well for reinvestment due to the lower tax rates, which will boost hiring.”

McNerney said the office market is in transition, which is why we haven’t seen a lot of office built anywhere in San Diego or around the country, not just in downtown. He said that’s because coming out of the recession there was so much supply, and now there are changes in the marketplace.

Another variable is the change in tenants and what they want their offices to look like to attract talent. “So we’re still in transition, which is why we’re seeing old buildings around the country being converted to creative office space,” McNerney said. “Those kind of buildings are getting the highest rents, even over high-rises and Class-A buildings.”

He said downtown San Diego doesn’t have a lot of the types of buildings that provide an opportunity to do that. To re-create that environment you have to build new construction that looks like old construction that’s been redone, and that’s expensive. “It takes creativity and higher rental rates, but that’s what tenants are looking for. One of the great things about downtown compared to the suburban markets is you have a lot of amenities, so you don’t have to create them.”

In downtown, there’s still the issue of parking, McNerney said. "To get companies mentally over the fact that you’re not going to get 400/1,000 parking in downtown, we have to provide better access to mass transit. In cities trying to do that, companies have to be convinced that their employees will be comfortable walking to work, biking to work, taking mass transit to work. So it’s an evolution that’s happening,” he said, “right now we’re just trying to get population up in downtown.

"I think we’ll see the pendulum swing back the other way where we’ll get more office.” McNerney said the Lankford team is marketing a spec office project that will create some unique creative office space in East Village’s Makers Quarter.

“One thing that’s great about San Diego — and I’ve worked in a lot of different markets — is that it’s a very camaraderie-type of community,” McNerney said. “We all root for each other to be successful. Yes, we compete for sites and for things, but we also root for each other. I’m rooting for Lankford, I’m rooting for Holland, I’m rooting for Cisterra, and I’m rooting for San Diego. It’s time we come together to solve big problems like homelessness.”

“From an investment perspective, the probability of downside right now is better than the probability of upside, so we are being very, very careful,” Jinich said. His company isn’t making many offers and isn’t chasing deals like it has over the last few years.

Suggesting the defense establishment may be the greatest driver of San Diego’s economy, he said it will be interesting to see how defense spending under the new administration impacts the local economy. “Will economic dynamism come with defense establishment spending or will we have to pull back on acquiring, investing more here in San Diego,” he asked.