By Lou Hirsh

Mayor Bob Filner recently appointed Jason Hughes, who heads the local brokerage firm Hughes Marino Inc., to advise the City of San Diego on a volunteer basis as it decides what to do with a half-million square feet of downtown office leases set to expire in the next few months.

Local brokers, however, note that the city is hardly the only tenant facing decisions about its downtown footprint. The central business district has long lagged behind other local office markets for tenant growth, but has recently seen an influx of small and large firms making their homes downtown, with others considering similar moves.

According to a recent report from Cushman & Wakefield, downtown’s direct office vacancy rate, with sublet space not included, stood at 17.6 percent at the end of the first quarter. That was higher than the countywide rate of 12.3 percent, and higher than the vacancy rates of Kearny Mesa (9.2 percent), Mission Valley (11.3 percent), Sorrento Mesa (5.3 percent) and UTC (7.3 percent).

However, downtown saw just under 200,000 square feet of office leasing activity in the quarter, ahead of all of those other markets except Mission Valley, with just over 213,000 square feet. That includes renewals and new signings.

Positive Absorption

CoStar Group reported 58,748 square feet of positive net absorption year to date for downtown San Diego, accounting for a sizable portion of San Diego County’s 333,348 square feet of positive absorption — more office space being occupied than vacated.

Filner appointed Hughes, president and CEO of downtown-based Hughes Marino, as a special assistant to advise the Mayor’s Office on the city’s downtown office real estate needs. Hughes’ firm deals primarily in tenant representation.

The position is voluntary and expected to continue as long as necessary, as the city evaluates what to do with about 550,000 square feet of current leases in transition. “I appreciate Jason’s commitment to public service in this advisory role, which he will perform without compensation from any party,” Filner said in a statement.

The city has leases expiring soon at three downtown buildings where it houses operations apart from the main Civic Center complex — at 1200 Third Ave., 1010 Second Ave., and 600 B St.

The B Street space is set to expire in about a month, while leases at the other sites expire in early to mid-2014.

Experts note that the city will likely be able to drive leasing bargains in its own deliberations, even with an overall market improving for landlords. While downtown’s Class A office vacancy rate is currently at 15.4 percent, Class B space is 19.1 percent vacant, according to CoStar.

Class B Space Gaining Attention

Brokers note that large blocks of Class A office space are becoming increasingly hard to find throughout the region, putting more attention on older Class B properties in the downtown area and elsewhere.

“I think a lot of people realize there are a lot of good packages still available for tenants in the downtown area right now, but they also know that the quality stuff is filling up and it’s going to be gone soon,” said Andy La Dow, senior managing director in the downtown office of Cassidy Turley San Diego.

La Dow said the East Village area in recent months has seen a steady influx of small, early-stage technology companies, as well as other types of small firms with a strong Internet component, such as those involved in financial services and marketing.

Meanwhile, the western part of downtown is being looked at by larger established firms, including technology, insurance and other financial service companies, seeking large spaces to consolidate local operations or establish their first San Diego presence.

Young Professionals

Experts say much of this is driven by firms’ desire to attract young workers who prefer living in urban centers and cutting down on car trips. Young professionals already make up a large proportion of downtown San Diego’s growing residential population.

“The needs of the employees are what are driving this,” said Richard Gonor, executive vice president in the downtown San Diego office of brokerage firm Jones Lang LaSalle, noting the trend is already in full force in places like San Francisco.

“The younger workers don’t necessarily want to be in a suburban office built in the last 10 or 20 years,” Gonor said. “They want to be in a place geared to a 24-7 environment, with lots of amenities and places to go near where they work.”

Big Decisions

According to local brokerage firms, the downtown business district is set to see other tenant turnover in 2013 and 2014, in addition to the City of San Diego’s potential moves.

For instance, Sempra Energy has issued requirements for 300,000 square feet, as it evaluates options in downtown and Kearny Mesa. JLL notes that Sempra currently leases 310,000 square feet at 101 Ash St. and about 33,000 square feet in the adjacent 110 Plaza on West A Street, expiring in July.

Also at 110 Plaza, the California Attorney General’s office has a lease set to expire in 2015, and could wind up relocating to a new state courthouse set to break ground downtown by the end of this year.

At Columbia Center, 401 W. A St., JLL notes that the federal General Services Administration has 84,000 square feet of staggered leases expiring over the next two years; and Noble Energy has 23,000 square feet expiring in 2015. Both are expected to stay in the downtown area.

The law firm Latham & Watkins has 80,000 square feet expiring in February 2014 at One America Plaza on West Broadway, as it moves to a new build-to-suit location currently under construction in Del Mar Heights. One America’s owner, Irvine Co., has received multiple offers on that space, Gonor said.

Financial service firms are also weighing their options. JLL reports that Liberty Mutual Insurance has 80,000 square feet expiring in December, and is looking to downsize to about 50,000 square feet — either in its current downtown spot at 525 B St., or in Mission Valley. According to Cassidy Turley’s Broderick, Liberty Mutual is finalizing arrangements to relocate to a space in Mission Valley.

Also, Arrowhead General Insurance Agency Inc. has 70,000 square feet expiring in 2014 at 701 B St. Brokers report the firm is evaluating options including consolidating the location with its Mission Valley office, or locating elsewhere in downtown or UTC.