By Jason Hughes
Most downtown companies know me or my daughter, Star, as we’ve had the privilege to represent you with your office leasing. One multi-building landlord says we represent 95% of the tenants in the market. Another says we account for 80+%. Regardless of the exact percentage, we represent the vast majority of downtown companies with their office leases or building purchases every year. So, who better to tell you the truth about the REAL state of the office market? Star and I—who only represent tenants and vow to never represent institutional landlords in their leasing and selling of buildings? Or the dual agent brokerage companies who derive most of their revenues from landlords by providing them leasing services, property management services, asset management, financing, etc.? Some of these dual agent brokerages even own downtown properties themselves! These brokers have assisted landlords with pushing rents to unsustainable levels while at the same time, more and more office space has become available. These brokers are also “advising” institutional investors who purchase these large buildings—or redevelop large buildings—and tell them what they need to hear in order to underwrite such massive investments. But alas, the truth and the reality is that there is a massive amount of vacant space in downtown office buildings—and it’s only the beginning.
Let’s take a look at some numbers:
32% office availability in Downtown!
DiamondView Tower (350 Tenth Avenue at Petco Park)
– This building was nearly 100% committed just a couple years ago. Now it is 37% available with virtually no takers. Current landlord wants $5/SF in a market that supports substantially less than that. They need an across the board rental reduction of 25% to find much interest.
1155 Island (former Thomas Jefferson School of Law Building in East Village)
– Investors bought this building nearly two years ago. They gutted it to make ready for new tenants to lease it. To date they’ve only signed a ground-floor food service amenity. It’s nearly 180,000 SF and almost totally vacant—and will likely stay that way for another few years unless the ownership realizes their rates are at least $1/SF too high.
770 First Avenue (former Paladion across from the former Nordstrom at Horton Plaza)
– Bosa took this building down to shell (removed all exterior and interior)—and rebuilt. Great job with the finished product—but the floor plates are very large in a market with small-sized tenants. They are more realistic about rents than many others—but the rents are still too high. Meanwhile, it’s totally complete at 170,000 SF with zero leasing done.
Campus at Horton Plaza—Phase 1
– Stockdale Capital bought Horton Plaza believing they could pull another rabbit out of their hat like they did with the Scottsdale Galleria; unfortunately, Downtown San Diego isn’t recognized as a great call-center hub, and minimum wage will barely pay for employee parking. Meanwhile, they are actively redeveloping the former Nordstrom by adding four more stories to it, which will create over 700,000 SF of additional office space. This is anticipated to be complete mid-next year! And as expected, zero leasing to date. Phase 2 will be even more office space—but is several years out (if at all!).
1420 Kettner (former US Bank Building on Kettner and Ash)
– Currently 98% available! A coworking company took some of the building—but we all know the state of co-working! All that space is available for a premium—as well as the balance of the building.
Tower 180 (aka 180 Broadway—formerly known as 1010 Second Avenue or the Executive Complex)
– Nearly vacant! Over 310,000 SF empty!
Chamber Building at 110 West C Street
– 68% available!
– 44% available!
550 Corporate Center (550 West C Street)
– 34% available!
600 B Street
– 22% available before WeWork likely dumps a bunch of their space (they have six floors—a large percentage of which is unoccupied).
701 B Street
– 31% available—and that’s assuming Thomas Jefferson School of Law survives their accreditation loss! Otherwise availability will skyrocket to 41%!
401 West A Street
– 23% available!
The vacancies above don’t include all of the shadow space available. Shadow space includes off-market subleases; space potentially available—but not currently being publicly marketed due to a number of factors (employee retention; winding down of office; currently being acquired; etc.). For example, Star and I recently identified over 100,000 square feet of shadow space in One America Plaza (600 West Broadway) alone!
Moral of this story: for downtown office tenants, rental rates will be going down while space alternatives and leasing concessions (free rent, moving allowances, etc.) will be going up. It’s taken a while, but tenants, the ultimate customer in the commercial real estate ecosystem, will once again be treated like the customer instead of the beggar. Good times are (soon to be) here, again!
Jason Hughes is chairman, CEO, and owner 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 25 years. He writes about topics in commercial real estate from a tenant’s perspective on his blog, Downtown Dirt. Contact Jason at 1-844-662-6635 or email@example.com to learn more.