San Diego-based CEO Jason Hughes is an expert on commercial properties, and he says there are a lot of twists and turns happening in the area at the moment. Jason Hughes adds the COVID-19 pandemic hasn’t helped matters, and there’s an undeniable shift for companies either using a hybrid work model or going completely virtual.
“San Diego comprises a lot of submarkets. Whether you’re talking about the industry type or geography within San Diego County, there are a lot of different aspects that you have to take one by one,” Jason Hughes says. “Downtown is a very different environment than other markets. There is tremendous availability of space downtown.”
Hughes says landlords are finding it very difficult to lease space for a variety of reasons due to overbuilding over the past decade. “We had a lot of conversions from non-office to office,” Jason Hughes says. “And at the same time, we’ve had a lot of companies that have been able to use this hybrid work model and say, ‘You know what? We just don’t need the same amount of space.’”
San Diego’s Downtown Homeless Population Is Growing
The longtime San Diego business owner says downtown’s homeless population has created a perfect storm.
The Downtown San Diego Partnership, a nonprofit championing economic and cultural longevity in Downtown San Diego, conducted a census in January and found street homelessness has jumped more than 60% in Downtown San Diego since last spring.
“I think it’s primarily due to non-space issues, which are things like homelessness. Homelessness is a big problem downtown,” says Hughes. “You have a number of companies that are currently downtown saying, ‘We don’t want to be down here anymore.’ So they’ve moved out. Meanwhile, there’s been new products, and new office buildings added to the inventory. There are new developments underway that are about to be put on the market, yet there’s no real velocity of tenant interest. This is creating a really bad situation. If you’re a Downtown San Diego landlord, I would be in panic mode right now.”
That being said, Jason Hughes explains there are some dynamics that insulate from the typical drop one would see in a normal supply and demand equilibrium.
“You have a couple of very large landlords with very deep pockets that have little or no debt, so they have the wherewithal to ride through this storm,” Jason Hughes says. “There are other building owners that have nearly empty buildings with no prospects in sight, that are in deep trouble. That drives pressure down. Meanwhile, there are always a few poorly represented tenants that sign ridiculously high rent leases and then screw up reality. They’re now paying this inflated market rent that every landlord wants and now believes is possible, but other tenants think, ‘Well, why would I pay triple of anywhere else I could be?’ So it’s just this weird flux environment for downtown.”
Jason Hughes says he views downtown as the outlier for San Diego, and the area alongside Torrey Pines has become the epicenter for the life science biotech industry.
“It’s adjacent to UCSD [University of California, San Diego], and that’s where the hub has been for decades for life science. That sector has exploded. The market has grown 4.5 million feet of life science in the last 18 months,” Jason Hughes explains. “It’s been a huge growth of space. The landlords in the Golden Triangle, aka UTC [University Town Center], have started pushing out office tenants from their traditional office buildings to convert them to life science lab-type buildings. They are basically shrinking the total inventory of office buildings. They are then bringing in a whole different user that will pay substantially inflated rental rates. And at the same time, some of the big tech companies from Silicon Valley have been moving into town. For example, Apple has come into town and taken a million and a half feet just in the last five years, to compete with Qualcomm. That whole sector has gobbled up much of the available space.”
San Diego Local Businesses Getting Left in the Lurch
As more companies compete for space within the life sciences sector, Jason Hughes says it’s pushing out the locals.
“San Diego has historically been more of a cul-de-sac, mostly locally owned and grown type environment,” Jason Hughes says. “And usually as you get bought, as you go public, most of the time they relocate from San Diego. They move up to San Francisco, they get bought and pulled somewhere else. The ones that have been here forever are now getting pushed out and forced to relocate. Many are also local tech and professional service companies, but because they can’t pay double the rent, they’re being forced to move to different submarkets and lesser quality building options.”
Jason Hughes says with less supply and more demand, prices go up. “San Diego commercial real estate comprises the haves and have-nots. Downtown is the have-not; there is very little new tenant base that’s interested in being downtown. There is tremendous supply with very little demand, so it’s really hard for landlords to push up rental rates, with few exceptions,” he says. “UTC, on the other hand, is going the opposite way. Rates are going up, availability options are going down, and tenants, especially locally-based tenants, are being priced out of the market. Most companies can’t pay three times the rent that they were paying last year. There’s a breaking point where tenants are starting to say, ‘I can’t afford this. I can’t do this.’”