Article by:Carrie Rossenfeld
View Article at Globe St.
SAN DIEGO—The drive for better amenities in modern office buildings comes from a desire to recruit and retain talent more than any other factor, speakers at NAIOP San Diego’s “Development Today” breakfast event here said Thursday. Panelists included accomplished developers in the San Diego marketplace, speaking about where they see opportunity, what they are building, why they select locations and amenities and how they make it all pencil when they exit.
One of the common themes of the event was the difficulty of getting projects off the ground in the San Diego market. Despite strong fundamentals, financing for spec development is not easy to come by in a market where the barriers to entry are so great from both a regulatory and city-planning perspective and NIMBYism is strong. “Underwriting is difficult; it’s so hard to get construction financing for spec that many developers are doing mini-parks with five-to-seven-year financing,” said Tom Blake, president of Coast Income Properties, whose specialty is retail development. “It’s challenging and getting more so.”
Mike Murphy, president of Murphy Development, which specializes in industrial properties, gave an example of how difficult the borrowing process is by talking about a recent loan in which his firm got 35% LTV—“We had to put up 65% of it ourselves.”
Blake added that having a nice financial statement and experience do help, but even with those elements it’s difficult. Jamas Gwilliam, VP of Kilroy Realty, which focuses on class-A office and mixed-use properties, said, “The City comes to a grinding halt when things don’t fit within their box. We’re trying to grow San Diego, and hopefully One Paseo will inspire confidence in our capital partners.” He added that time delays due to red tape with entitlements and other paperwork are hard on cutting-edge projects.
Murphy said his firm tries to work ahead with paperwork to prevent red tape from slowing down projects. “You have to get the paperwork out of the way immediately when planning a development project because the City takes its time. It can take a year for permitting, so it’s good to remove that first year of the process.”
One projects do get going, however, the big focus is on amenities in the workplace. Phil Monroe, a principal with Locale Advisors, which focuses on creative-office spec space, said, “You can’t develop a standard-issue office building anymore.” But, at the same time, you need to “pick amenities that fit the DNA of the site and don’t kill the culture.” Bocce courts and yoga classes are great, but only if they fit the building and the tenants within. Still, the push for food trucks and other amenities that appeal to Millennials is here to stay, so it’s important to focus on them.
Gwilliam pointed out that in San Diego, smart employers are making it comfortable for employees and making sure there is a match or flow between the natural and the built environment. He said rent premiums are yet to be seen in San Diego, so there’s still room for growth there.
Tracy Murphy, SVP, West Coast, for BioMed Realty, which specializes in life-sciences properties includig the cutting-edge i3 project currently under construction, pointed out that the real competition is for talent, not amenities. “It’s about doing them well—not a one-size-fits-all application across your portfolio.” She says it’s important to understand how the employees work within the site—for example, in life-sciences, research scientists can work very off-hours, and this needs to be reflected in how and when service amenities are offered, including lighting and safety issues. “We have to incorporate that into our real estate.”
Monroe added that it’s about “activating the people on the site—not the physical amenities, but creating an environment for Millennials” to thrive.
When moderator Brian Russell, SVP of Eastdil Secured, asked the panelists in which submarkets of San Diego they see growth, answers ranged from Torrey Pines, where life sciences is strong, to the South Bay for its powerful labor market to the 56 freeway corridor and Downtown. They emphasized how important it is that the City is trying to redo the general plans of areas like Clairemont Mesa and Kearny Mesa and that proactive cities like Seattle have led to great growth in those markets. “We’ve got to consider a change in plans here to accommodate where things are going,” said BioMed’s Murphy.
All of the developers were very optimistic about San Diego’s fundamentals and the opportunity for growth here if the area became more open development friendly. Mike Murphy said, “We have a wonderful opportunity in San Diego. We have phenomenal weather, instead of wine and cheese we have the beer guys, and I think we will ride the wave here for three to five years. It will be spectacular.”