Kraig Kristofferson, senior vice president of CB Richard Ellis, has a bullish outlook on Downtown’s future prospects, saying institutional investors are purchasing office buildings in spite of high prices. (photo/lambertphoto.com)

When Broadway 655 opens next year, the 23-story building will be the first new office high-rise completed in Downtown San Diego in 14 years. With two more office buildings set to break ground, Downtown really is seeing some commercial construction.

Whether that boomlet will turn into a larger wave of construction — or whether it will fizzle and lead to another moribund spell — is the subject of debate and speculation among developers, leasing agents and redevelopment officials. For good or bad, the explosion in new housing construction Downtown is affecting office construction.

Some say residential must be reigned in to give commercial developers a fair shot at a limited number of prime parcels. But others say the torrid pace of residential construction will itself fuel resurgence in the Downtown office market.

Against this backdrop, civic and business leaders have a pair of initiatives under way that will help shape the Downtown skyline for years to come. The Centre City Development Corp., the city’s redevelopment arm, is overseeing an update of the Downtown Community Plan for the first time since 1992. Also, the Downtown San Diego Partnership, with a number of other entities, is continuing a public-private campaign to lure new businesses to the city.

If consensus exists, it centers on two points: new housing construction Downtown is a good thing, and in order to sustain the positive economic climate and create jobs for new residents, office construction must follow. How to get there, however, is a matter of discussion.

“I think every city will find its natural balance. The market is pretty efficient and the market will lead to that balance,” says John Kratzer, president and CEO of JMI Realty Inc., developer of Petco Park and the 26-block Ballpark District. Kratzer also is chairman of the Downtown San Diego Partnership.

John Kratzer, president and CEO of JMI Realty Inc., the developer of Petco Park, believes residential activity is the catalyst that will bring the next office building wave to Downtown San Diego. (photo/lambertphoto.com)

“I’m not at all concerned that there’s too much residential activity,” Kratzer says. “To the contrary, residential activity is the very catalyst that will bring the next office building wave, or office building cycle. It is the golden goose right now.”

Yet Jason Hughes, a principal with commercial real estate brokerage firm Irving Hughes, says CCDC should limit where new residential projects can be built Downtown so prime parcels are available for commercial builders. The hot housing market, he says, has driven up land costs to the point where office developers are unlikely to be able to charge rents that justify their construction costs.

“Part of the problem is that office buildings are limited to the ‘core’ area while residential buildings can be built anywhere Downtown,” says Hughes. “Thus, lots of the future good office building sites have been cannibalized by residential towers.”

Hughes, whose company represents tenants in leasing negotiations with commercial landlords — including the law firm that will anchor Broadway 655 — laments that many Downtown parcels have been either built or are planned for residential, when they would have made good office sites. He cites the Treo condominium high-rise on India Street, a site originally slated for an office building.

“That’s a perfect office building location and now it’s gone,” he says, adding that Downtown “is now so residential oriented we’re losing the future potential that made it attractive for residential in the first place.”

CCDC tried three times over the past 25 years to trigger a housing boom Downtown, and only the third attempt took root, says Peter Hall, president of the city’s redevelopment agency.

Earlier efforts in the late 1970s and the late 1980s produced several developments, but the units sold slowly and both attempts failed to ignite an explosion in residential development across Downtown.

It was the third attempt in the late 1990s that caught on, says Hall. “The market finally has traction, it’s on fire.”

CCDC sold property at Broadway and Kettner to developer Robert Lankford (above) for the Broadway 655 project (left), even though it could have fetched a higher price as a residential project. (photo/lambertphoto.com)

That’s why, in the past year or two, the agency has turned its focus to commercial, or job-generating development. Examples of its efforts can be seen in the Ballpark District, along with a planned mixed-use building at Park Boulevard and C Street called “Smart Corner,” and the Broadway 655 project now being built at Broadway and Kettner. Hall says CCDC sold the land to developer Robert Lankford for the project, even though it could have fetched a higher price as a residential development.

“That was an investment in getting office going again,” Hall says.

The updated Downtown community plan now working its way through CCDC and City Hall calls for 150,000 people working Downtown each day, and 80,000 residents. Today about 75,000 people work Downtown and the area has 20,000 residents.

“When you take the big picture view, we will build out for 150,000 employees,” says Hall. “That’s the capacity and the goal and the plan and we’re (CCDC) responsible for making that happen.”

Broadway 655 is a $140 million project that will add 426,000 square feet of commercial space to Downtown’s inventory. That breaks down into 365,000 square feet of office, 16,000 square feet of restaurant and retail, 17 residential units and parking for 765 cars.

Construction began in December, and the first occupants are slated to move in by next summer, says Lankford.

“We’ve got our target and we think we’ll be fine in hitting it,” he says. Crews are up to the 12th floor in structural steel, and the concrete core, or spine of the building, is up to the 15th floor.

Because of the long gap between the opening of the last new office building — One America Plaza on Broadway — and Lankford’s Broadway 655, Lankford says his new building will offer technology that wasn’t available in older buildings.

Broadway 655 also will help ease a crunch in available Downtown office space. Depending who you ask and how you slice it, Downtown’s total inventory of office space is about 10 million square feet, and the vacancy rate hovers just below 10 percent.

Jason Hughes of Irving Hughes calls that number deceptive, because much of the available space is undesirable to most tenants because of its configuration, lower-floor location and other factors.

Lankford foresees a continuing demand for more office space, and has put that belief into action both through his Broadway 655 project, and the Smart Corner development, which will soon break ground.

The anchor tenant of Broadway 655 is the law firm of Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, LLP. The company has signed a 10-year lease for the top seven floors of the building, or some 135,000 square feet.

John Stoia, managing partner, says his firm needed more space and without Broadway 655 would probably have had to move out of Downtown. Stoia says the firm is excited about moving into a brand-new building, because the empty floors are a blank slate they can design and build to meet their needs. “It allowed us to design it the way we wanted to design it, and wire it the way we wanted to wire it,” he said, including such bells and whistles as video-conferencing from attorneys’ desks.

Another office high-rise in the pipeline is Diamond View Towers, a 14-story building that will boast balconies with views of the playing field at Petco Park. The project is being developed by Cisterra Partners, which hopes to break ground early next year. The project is just shy of being 50 percent leased, says Jason Wood, Cisterra’s director of development.

“Residential development in Downtown and south of Downtown is bringing Downtown back to being the center of the county in terms of where people live and companies like to locate, someplace that’s accessible to all of their employees. Long-term? Downtown is going to become more in demand,” Wood says.

Diamond View Towers is envisioned to include 232,000 square feet of office space and 74,000 square feet of retail, including a restaurant, a health club on the second floor, and high-end shops, Wood says.

Construction of the $90 million project just beyond right field at Petco Park will take about two years.

“You need more daytime office user traffic in that area. We hope to be the first of three or four buildings that get built down there,” Wood says.

Those involved with Downtown office consider it unlikely San Diego will face another 14-year drought of new office buildings in the urban core. Reasons for optimism include the new ballpark, housing and generally better economic conditions than in the early 1990s. The long dry spell was the culmination of a “perfect storm” of events, including the opening of five new office towers in a short period of time, along with a drop in demand due to the savings and loan collapse and other economic factors, says CCDC’s Hall.

Or, as Hughes puts it, “We had this convergence of everything bad happening at one time to commercial real estate. It was like the triplewitching hour.”

Long-time commercial real estate broker Kraig Kristofferson, senior vice president with CB Richard Ellis, says, “I think it is as exciting a time as we have seen in San Diego. The days of everything south of Broadway being a tattoo shop or massage parlor are long gone.”

Kristofferson says he is buoyed by the fact that institutional investors are purchasing office buildings in San Diego, in spite of high prices that push down return on investment. He says that attitude signals a bullish outlook on Downtown’s future prospects.

Another positive sign, he says, is a report by research groups showing that commercial rents are likely to grow in Downtown San Diego by an average of 8.4 percent annually for the next three years. “Those are numbers that we have really never seen,” says Kristofferson. “That’s how strong they see the future for the downtown office market.”

Kratzer, of JMI Realty, expects to see plenty of commercial development in and around Downtown, including the Ballpark District, thanks in large measure to the influx of new downtown residents.

Kratzer says he doubts the city will go another 14 years without new office development. “There’s too much momentum, in my opinion,” he says.