A business headline in the mid-1980s
read, “Will the last tenant out of downtown please turn the lights out?”
Unfortunately, the creative quip correctly
foreshadowed the impending collapse of
the downtown office market.
The 1980s concluded with tenants moving
out of downtown to cheap alternatives in
the suburbs — in concert with the opening
of five new downtown high-rises and a horrid recession. The dust finally settled with a
vacancy rate approaching 40 percent.
“The subsequent years have brought so
much change — and so little change,” says
Craig Irving, a principal at Irving Hughes. “A
thriving central business district is paramount to the economic, social and cultural
fabric of our region.”
Smart Business spoke with Irving about
the current health of the downtown office
market and where it’s heading next.
What is the current status of the downtown
office market?
Downtown’s share of the region’s office
market sits at about 15 percent. The current
vacancy rate is approximately 16 percent,
up from 11 percent a year ago. Factors
involved in that increase include People
First moving 100,000 feet of space to Texas
and smaller tenants moving to the suburbs.
A suburban tenant of reasonable size
occasionally moves into the 92101 ZIP
Code. American Specialty Health took over
the Paladion in the 1990s; Gray Cary later
moved into 80,000 square feet; and Eset, a
technology company, recently settled into
25,000 square feet. It’s unfortunate there are
not more.
How did the downtown office market reach its
current state?
Following the mass exodus in the late
1980s, a major imbalance of office space
occurred, with more than 97 percent of all
new office space being built in the suburbs.
Meanwhile, 70 percent of the office inventory downtown was showing its age. Of the 16
business clusters that drive the region’s
economy, (including wireless, communication, biotech and defense), only three (government, legal and financial) have a major presence downtown. Further, of the 3 million square feet now under construction in
the region, none are downtown. Organic
growth of existing downtown tenants has
for the last 20 years primarily fueled downtown’s growth.
What factors drive tenants from the downtown market?
Beyond the major business sectors, most
tenants are small business owners. After
personnel costs, rent is their next-biggest
expense. For example, when a small alw
firm’s lease is set to expire, the new landlord, who just paid an exorbitant price for
the building, plans to raise rent by 40 percent. The tenant does the math and determines it’ll either have to raise billing rates 20
percent to 25 percent or increase work
hours by 120 to 125 percent. Neither is a
good choice. The third option is to move the
business to a location that will afford the
company a par (or better) quality of life.
Downtown tenants are also subject to a
lack of parking. Very few surface lots
remain due to those lots now being filled
with high-rise condo buildings. The remaining surface lots charge an arm and a leg and
make it prohibitive for employers to offer
parking benefits. This impacts employee
morale, retention and recruiting efforts.
How does transportation come into play?
Many CEOs reside in Rancho Santa Fe,
Del Mar and Fairbanks. The nightmare of
the I-5/I-805 merge has influenced some to
limit their office space search to anywhere
north of the merge. Demographic studies of
where all the employees live in the county
should be evaluated and considered before
eliminating certain geographic locations,
but it is rarely part of the process.
Along the way, former city planners who
forced developers of high-rise buildings to
limit their parking to one space per 1,000
square feet also failed miserably to provide
alternative means of transportation for commuters. Had those same planners imposed
the same parking regulations on suburban
developers, downtown would have held a
major advantage because, as bad as it is, it is
the hub of mass transit in the county.
How has this cycle forever changed the
region?
In 1985, under great mayoral leadership
from Pete Wilson, Ernie Hahn opened
Horton Plaza. Some said this was a risky
endeavor, but the Gaslamp District emerged
as a fantastic destination for residents and
visitors. Hotels sprung up and the convention center expanded, bringing millions of
dollars to our region and billions of dollars
invested into downtown’s resurgence.
Residential development exploded, and we
now have a vibrant central business district.
What is the outlook for downtown?
The downtown office market will always
be fickle, but its resurgence provides a glimmer of hope for the future. Meanwhile,
South San Diego will continue to build housing for the work force of our county. Downtown is the central location; hopefully CEOs
soon will let their workers exit downtown
instead of continuing up the I-5 freeway —
or better yet, let them take the trolley
straight into downtown. Fewer cars on the
roads would be great for everyone.
CRAIG A. IRVING is a principal of Irving Hughes, San Diego.
Reach him at (619) 238-4393 or [email protected].