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 Like promises of a practical electric car, commercial development of the 15 acres of Santa Fe Depot property controlled by Catellus Development Corp. has been just around the corner for more than two decades. Now, having banked $41 million after selling three prime parcels for residential towers and likely in discussions to sell a fourth for the same use, the San Francisco-based real estate giant is pulling up its office stakes. What would have been the most striking and westward facing office in the Downtown inventory lies quietly on an architect’s hard drive, perhaps forever.
While Catellus winds down — Bill Scott, the senior vice president of development who remains in San Diego, offers no guarantees on even his own tenure — Lankford & Associates Inc. is pressing ahead with its scaled-down, 23-story tower on Broadway at Kettner. The company is confident the $150 million project will break ground in the middle of the second quarter. Some Downtown brokers speculate Lankford is nearly out of time to meet the leasing schedule of its anchor tenant, the Milberg Weiss Bershad Hynes & Lerach law firm, but the developer expresses confidence about making deadline. On a smaller scale, but looking to offer Class A space with an intriguing twist, Cisterra Development is poised to buy from JMI Realty the center field property behind the new Downtown ballpark. Cisterra’s effort is facing intense scrutiny, however, with both its 11-story height and 240-foot width being criticized by redevelopment agency staff as too large for the site. In a worst case scenario for Downtown, none of the projects is built and Milberg Weiss moves to the suburbs. “Here you have one of the most profitable law firms in the country,” says Jason Hughes, a principal with commercial leasing brokerage Irving Hughes. “If they have to leave Downtown for new space, what kind of message does that send?” The Catellus Evolution To understand how Catellus moved from land developer to seller requires going back 20 years. At that time, the Centre City Development Corp. was concerned about plans by Sante Fe Realty Corp., the Catellus precursor, to raze the historic Santa Fe Depot in favor of a modern multi-modal transportation center. The CCDC in 1983 talked the company into saving the train station in exchange for 4.6 million square feet in guaranteed development rights. A year later, Catellus came into existence as a real estate operating subsidiary of Santa Fe Pacific Railroad. In December 1990, the company was spun off to Santa Fe’s common stockholders, taking with it the parent company’s vast land holdings. In 1993, with Catellus having missed a deadline to start construction, the company renegotiated its deal, reducing to 3.3 million square feet the maximum it would construct and agreeing to numerous improvements and beneficial changes to San Diego. Examples include allowing the trolley to use its right-of-way instead of being pushed to the middle of Pacific Highway and an extensive hardscape and design upgrade of the depot’s Broadway face. About that same time, Catellus began advancing plans for 1.8 million square feet of office space in seven buildings plus three residential towers. By then, Catellus had missed the commercial development cycle. One America Plaza had just opened, following Symphony Towers, Koll Center and Emerald Center. A depression masquerading as a recession crept upon the community, brought on in part by the demise of the Cold War and its crushing of the region’s defense hardware industry. Equally hard on Downtown was the final petering out of the headquarters industry for mid-sized banks and savings and loans. While Downtown commercial development stalled, the suburban office communities, ranging from Sorrento Mesa to Del Mar Heights, zoomed. Developers took advantage of generous rules that allowed low-intensity service buildings to be built on property zoned for R&D or manufacturing. All told, 59 million square feet of office and industrial property was built around the county between 1993 and 2003. (Ironically, this suburban building boom contributed to an industry-sponsored warning 18 months ago that San Diego was running out of land suitable for employment purposes.) In late 2000, Catellus popped back on the scene armed with dramatic art, a hefty marketing budget and the skills of Scott and marketing man Joel Mayne. Just two years and a half years later, the adventure is over. Where San Diego Fits
Catellus is a profitable company. In its most recent year the company earned $96.5 million and was holding $230.3 million in cash. In the first nine months of this fiscal year, it reports a profit of $14 million on revenue of $121 million. The recession does have the company pulling in its national development reins. It trimmed spending on huge projects in San Francisco and halted speculative office building in Chicago, Dallas and Denver. It does not lack for real estate, controlling more than 30 million square feet of income-producing buildings, three times the square footage of all commercial office buildings — Class A, B and C — in Downtown San Diego. In San Diego, the decision for Catellus to shutter its commercial efforts is personal for Mayne: He lost his job. “Unfortunately, the market has not developed to move forward with this project,” he says. “That, and several land sales we made to Bosa, really has removed the career opportunity for me. I certainly am looking for new challenges.” So what happened? Mayne says two years ago premium space in the suburban market was nearing $4 a square foot, a level that made a 425,000-square-foot office doable and attracted the interest of large tenants outside the core area. Then came the tech wreck and national recession. “We have gone from a very tight market place to a very glutted market place in terms of high vacancies and sublease space and falling rental rates,” he says. “All of which are detrimental to what we were trying to do.” Meeting Lenders’ Rules Major office projects today must be at least 50 percent preleased to obtain construction financing, a condition created in part by the glut of suburban space. Instead of hanging with a project, some tenants simply sign lease renewals, in effect taking themselves out of play for at least the next five years. Anchor tenants, those that ink deals for one or more floors, are even more challenging since they sign 10-year leases in order to obtain major landlord concessions. Hughes, the leading tenant-rep office broker Downtown, finds the lack of new product dismaying and hurtful. “Downtown needs it so badly nobody realizes how bad,” he says. Hughes is working closely with Lankford to lease the proposed 655 Broadway. He says demand for new space is real. “There is no question in my mind that a developer that broke ground now would have a home-run building,” he says. “There are law firms that have been in the same space for 20 years. The partners have evolved. The new partners say ‘we don’t need space built out like this. We don’t need a big law library, so much central file storage space or a secretary outside. We can make our space more efficient. On top of that we want new space, we are ready for a change.’ Right now, there are no options for them to go into.” With 4.4 million square feet of Class A space in the Downtown market, and a vacancy rate between 7 percent and 9 percent, it can be difficult to put together a combination of contiguous space and other amenities, like great views, for interested tenants.
“Despite the uncertain future for other commercial developers we continue to believe in the expanding office market and that there will be such as the economy picks up steam again,” says Stacey Lankford, director of special projects. Lankford dismisses discussion that the latest deadline could be missed. “It is not a tangible threat,” she says. “It is more just putting our nose to the grindstone.” Harder work also will come when ground is broken and Hensel Phelps Construction Co., as the general contractor, begins to hustle to meet the fourth quarter 2004 opening date. Cautiously optimistic about Lankford, Hughes is skeptical Catellus will ever be able to correctly time the quirky San Diego market. “They do have some great property, but I don’t think they will ever be successful in developing it,” he says. “The best thing they could do is sell it to someone else that has the resources to make it happen. They will miss the next cycle again because they are just not nimble enough.” Catellus Answers Predicting a different fate for Catellus is Bill Scott, the Catellus senior executive here who has more than a quarter century of experience in San Diego real estate development. When Catellus in 2000 decided to move ahead with designing and marketing its project, One Santa Fe Place, conditions seemed ripe. “We were feeling that in conjunction with the improved residential market and all the new public-private projects going forward, the ballpark and North Embarcadero and other major civic projects, the office market would continue in a positive trend that would ultimately support the construction of a new building,” Scott says. “In the meantime, we continued to design an office building that would be ready to go when the market would support it. That hasn’t happened. We will see what happens three to four years out. Maybe at that time things will be much different.” At the same time, Scott cannot promise the office site will be held open by the company. Nor can he even say if, or for how long, he will remain in San Diego as Catellus’ representative. Such is life working for a public company, where growing shareholder profit is job one, whether through development or land sales. Scott defends the decision to pull back, noting most of the office towers built in the late 1980s ended up in various forms of financial trouble as growth moved to suburban markets and many traditional urban tenants, like headquarter banks, disappeared. Yet harkening back to his days in the Navy, when in the 1960s he took a motor launch from his ship to the Broadway Pier, Scott talks like a cheerleader about the energy being created by today’s burst of residential and entertainment development. He waxes nearly poetic about how projects, like plans to remake the North Embarcadero, will improve the city. “The positive is, a heck of an environment is being created Downtown,” he says. “We may be a little early for that demand, but it is coming.” Ballpark Marketing The newest contender on the Downtown commercial scene is Cisterra Corp. As it was preparing to break ground on a 42-acre research park in the UTC area, Cisterra was working to become the builder of an 11-story, $50 million office project behind the ballpark’s center field wall. With 209,000 square feet of rentable space, 186,000 of that office, Cisterra would be building prime time in an area far outside the traditional office zone. The company is aware of the risks that would come with such a pioneering role in the East Village. “That has been one of our concerns,” says Jason Wood, Cisterra’s development director. “It is a risk that we have expressed to both the Padres and CCDC; that there is not an existing office market down there. We are trying to create it. As much as we classify it as Downtown, it is not going to be part of the traditional office submarket of Broadway to B. This is going to be East Village. But we feel if you are going to try to create a new office submarket in the East Village, this is the one site to get it jump-started.” The very density and plethora of ballpark views that Cisterra and the Padres deem necessary for the project to succeed also are drawing the most heat. During a hearing at CCDC’s offices in late February, a clear split emerged between those who favored a much lower density project and those who saw a stagnant office market and the need to be creative to get it moving. It seems likely the project will shrink in size as its public vetting continues on the way to a May hearing before the San Diego City Council. If Cisterra believes the final result makes financial sense, the project would start construction later this year, targeting a spring 2005 opening. Elsewhere in the 26-block Ballpark District, JMI Realty has put plans for Campus On Park on hold. Originally, the project was to have been three relatively short buildings totaling 500,000 square feet and offering the type of large floorplates common in the high-tech areas like Sorrento Mesa. Bradford Perry, the Burnham marketing and leasing vice president who is JMI’s point man for finding tenants, says the project was recently reconfigured to include two office buildings totaling 400,000 square feet and offering 30,000-square-foot floor plates, large by Downtown standards. Perry still gets calls about the space and says the Class A market Downtown remains healthy, with rents holding firm even as vacancies creep up. He notes the wave of sales that includes Symphony Towers, One America, First National and the Chamber buildings are all positive signs about the health of the urban office community. “It is one of the most desirable commercial markets in the United States,” he says. “Investors are looking at Downtown San Diego and seeing a continued upside potential.” In Praise Of Bosa While Nat Bosa may one day get a statue for the boldness he has shown in creating and leading a Downtown residential renaissance, more than one civic leader hopes he and his brethren pass on any One Santa Fe land deal. Among those who will be frustrated if it converts to housing is Peter Hall, CCDC’s president. “I’d be disappointed because I think it is such a valuable site for a major corporate headquarters or multi-commercial tenant building,” he says. “They have de-signed a wonderful building. It would be one of the premier commercial addresses in San Diego. I hope they have the good fortune and long-term focus to see it happen.” Still, Hall understands that Catellus faces unique pressures. “We may all agree from an urban planning view, but that is not how Wall Street looks at the earnings of a public company.” Hall acknowledges Down-town is facing an unusual situation where residential land values exceed commercial. The problem is compounded in that commercial can be converted to residential, but not vice-versa. “I don’t think we are getting out of balance today but we ought to write a community plan that looks at our goals, values and where we should be 25 years from now,” Hall says. Such an effort is taking place. Hall also recalls when it was nearly impossible to bring residential development Downtown. “If you put it in perspective, you want live, work and play uses,” he says. “What we are having right now, which we should be celebrating, is a tremendous wave of housing going on. We had a wave of commercial, but right now we have residential and it is on fire.” Doug Wilson, one of the developers of Symphony Towers, is untroubled by the prospect of the Catellus site going all residential. He suggests those concerned elevator to the University Club lounge atop Symphony Towers and peruse the 1,500 acres of Downtown. Plenty of room for towers. He is concerned about the zoning rules that allow commercial to go residential but not the other way. As a member of a Downtown task force fine-tuning the existing community plan, he is pushing for density swaps and other measures that would undo some of those restrictions. It remains unclear how Downtown’s emerging neighborhoods would react to the prospects of hosting a significant commercial building. Finally, Julie Dillon, CCDC’s board vice chair, says it is important to ensure that government officials help, not hinder, any Downtown office project. “Heaven forbid that we end up being so good as a suburb that people live here and go to work someplace else,” Dillon says. “The live and play are doing great. We need to work on the work part.” She too would be disappointed if One Santa Fe Place became housing. “In my opinion, I would much rather see the beautiful office building that Catellus has proposed,” Dillon says. “That is the most appropriate and best thing that could happen. I would be very disappointed to see that replaced with something else. I would never say never. But it just seems like Broadway is our ceremonial commercial street and I would like to see it remain commercial.”
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Catellus’ decision comes at a time when Downtown office tower projects — the last one opened in 1992 — are fighting for life. If this development window is missed, some brokers say, leasing schedules mean it could be five or more years before the next projects would gear up. During that same period, today’s glut of suburban office space is likely to be absorbed, sparking a new round of development in the suburbs, where costs are less and parking plentiful.
The best near-term hope for tenants seeking new trophy space appears to be Lankford’s Broadway 655, a 375,000-square-foot tower at Broadway and Kettner. It was supposed to be 25 stories. It was supposed to break ground in the fourth quarter of 2002; then the first quarter of 2003 and now the second quarter. This new deadline seems a line in the sand to meet the needs of its anchor tenant, Milberg Weiss. (The law firm did not return calls for comment.)