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How to Salvage the Downtown Office Market

In so many ways, the good real estate fairy has smiled graciously on downtown San Diego over the past decade or so. With one wave of the magic wand there appeared Petco Park; with another, a major convention center expansion. Along with several small flicks of the scepter came thousands of new condominium units, scores of new restaurants of every flavor, bars and bistros, and more retail outlets than even my wife could ever hope to patronize.

Under normal conditions, all would be well in downtown’s land of plenty with hordes of tourists and conventioneers regularly crowding into the city’s central core from bay front and downtown hotels. However, streaming in the opposite direction in recent times have been corporate tenants who are vacating in droves to venues out yonder or are downsizing significantly. Just one example of the corporate exodus: three of the Big 4 accounting firms that once sported a downtown address are gone or will be by the end of the year. Same holds true for many law firms and other downtown corporate denizens.

So, why is there now a staggering 1.8 million square feet of office space laying vacant that will in all likelihood take landlords just under 28 months to lease? And, why is there nearly 600,000 square feet of negative absorption about to hit the downtown market as a result of even more companies, leaving, downsizing or just shutting their doors for good? (That doesn’t take into account the federal government’s plans to move out of several privately owned buildings into newly expanded courthouse facilities over the next couple of years or the nagging possibility there could be another 500,000 square feet of privately owned office space back on the market if a new City Hall is built despite adverse public opinion.

Overall, the economy is the chief culprit. Business hasn’t been, isn’t and isn’t likely to be the same as the good old days for tenants and pretty much the rest of the business community. It’s cold out there.

The parking situation is a major disincentive for sticking around 92101, though. Downtown parking fees for typical tenants adds an extra 20 to 80 cents per square feet, depending on the number of spaces needed—and whether there are any spaces. Most other office locales offer four to five spaces per 1,000 square feet of leased office space. Not so in the downtown district where the ratio shrinks to one or two spaces. Likewise, most other office markets offer free parking as opposed to downtown buildings where costs approach $200 a month per space.

The economy is what it is, but there are things office building owners can do to mitigate the ills besetting the downtown office market.

First, get aggressive in pricing. The vacancy rate is 20 percent and rising, meaning that leasing rates need to fall further in order for owners to capture market share. Frankly, a 20 percent reduction across the board is a good start.

Next, landlords need to get creative and solve their customers’ parking problems. That means providing more parking and at discounted rates. In other words, get competitive.

Office suites themselves need to be in better shape when showing them to the few prospective downtown tenants there are. Walking a client into a 20-year-old space that resembles a rabbit hutch doesn’t do much for getting a lease signed. Even a used car dealer will clean up a 1990 Dodge before sticking it out there on the lot. In other words, landlords—and I won’t push the used car salesman comparison any further—need to clean up their clunkers, too.

Better tenant improvement allowances and other incentives also would help jump-start a stalled market.

Finally, basic competence in brokering available office space wouldn’t hurt. Frankly, a good number of leasing agents have little or no knowledge about the downtown area, except where the nearest Starbucks is. And, marketing seems to be ignored by a growing number of brokers. Landlords need to insist that their representatives know what to do and how.

Having said all this, I’m super bullish on the future of the downtown office market, although the really good times are still several years away. The urban charm that fueled the over development of downtown housing is still intact. The surplus of downtown condominiums will eventually be absorbed by aspiring urbanites who like the idea of walking to work. Can’t do that in Sorrento Mesa.

Meanwhile, landlords and market-savvy brokers need to get to work to make downtown all that it can be.

Jason Hughes is founder of Hughes Marino, an award-winning commercial real estate company with offices across the nation. A pioneer in the field of tenant representation, Jason has exclusively represented tenants and buyers for more than 30 years. Contact Jason at 1-844-662-6635 or jason@hughesmarino.com to learn more.



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