Kilroy says that Japanese firms are mostly interested in urban cores because, hailing from a heavily urbanized island, that’s what they know best.
Four high-rise office buildings opened for business downtown in 1982, flooding the market with 1.7 million square feet of office space and immediately giving San Diego the highest vacancy rate in the nation. But what seemed like a ten-year glut of empty office space created by Columbia Centre (now the First National Bank building), the Wells Fargo Bank building, the Bank of America Plaza, and the Imperial Bank building, disappeared in five years, and to say downtown San Diego is booming is to acknowledge the obvious.
The Japanese are partners in the Emerald-Shapery Center on lower Broadway, due for completion in 1990.
Another generation of high-rises is currently germinating; four are in various stages of construction, and at least one more and possibly two are soon to break ground, all of them representing more than two million square feet of office space due to open by the end of 1990.
The $200 million Great American Plaza is due for groundbreaking next spring.
But what isn’t so obvious is the source of the power that has driven the jackhammers, raised the girders, poured the concrete, and mounted the window panes that look out over a downtown that has been transformed.
The Japanese are financing the construction of Symphony Towers at Seventh Avenue and B Street.
Who owns downtown? The people and entities serving up the new San Diego are in one sense the real powers in town. Generally, downtown developers concur that the city’s government-backed redevelopment efforts laid the foundation for these unseen agents of change. That groundwork began when most of the businesses and the land were owned locally, by longtime San Diegans. But ownership of much of the prime property is now passing from the hands of locals to the balance sheets of major corporations and insurance companies — the only entities that can marshal the kind of money needed to build and buy skyscrapers — and a new metropolis is replacing the old liberty port. Sailors and pensioners are being superseded on the sidewalks by lawyers, accountants, government lever-pullers, shoppers, and office clerks.
350 West Ash
Vice dens and funky bars are fast becoming a dim memory, supplanted by trolley tracks, refurbished storefronts, and the cool shadows of towering glass. For better or worse, downtown San Diego is well on its way to looking and feeling like downtown Seattle, downtown Dallas, downtown Generic. This could be merely a transitional period, or this could very well be it, the downtown we deserve. For a glimpse at some of fhe forces that brought us to this point, read on....
YEN FOR PROPERTY
There should be irony in the fact that a Japanese firm owns the skyscraper known as the Great American building at Sixth Avenue and B Street downtown. But since Kowa Real Estate Investments purchased the 24-story high-rise for $50 million in 1983, Japanese companies have been staking claims all over San Diego. Irony requires novelty, and the Japanese interest in San Diego real estate is no longer novel.
In fact, the Japanese are now competitors with the large American firms jostling for buildable space downtown. “San Diego County will see a tremendous influx of yen-driven investment in the next few years. That’s definite,’’ remarks an American businessman who works as a liaison between Japanese investors and San Diego developers. He asked that his name not be published, because every time he speaks to gatherings of businessmen, he's inundated with requests to find Japanese backers for local development projects. And he’s already up to his half-Windsor in joint American/Japanese projects.
For starters there’s the Aventine, a $150 million, mixed-use project on 11 acres in the Golden Triangle, east of La Jolla. The development, due for completion next November, is being built by the Naiman Company in partnership with Shimizu, a construction company; Nissho Iwai, a trading conglomerate; and TSA International, Ltd., a business conglomerate. One hundred percent of the financing is provided by nine Japanese banking firms.
The Japanese are busy elsewhere in North County. The Taisei Company is a partner in the new Sheraton Hotel on Torrey Pines mesa. Sports Shinko of Tokyo purchased the La Costa Hotel and Spa in November of 1987. And the liaison man, call him Kilroy, is working with the Japanese on a $170 million development project somewhere in San Diego County, but he won’t specify the location because the deal isn't yet sealed. “The Japanese are terribly slow," Kilroy explains. “There will be many more transactions with them here in the near future, but they’re only interested in the trophy properties, the signature buildings. A lot of American businessmen get frustrated at the slow, deliberate pace of the Japanese, who don’t rush into anything."
Kilroy says that Japanese firms are mostly interested in urban cores because, hailing from a heavily urbanized island, that’s what they know best. So the Aventine, being miles away from downtown San Diego, was a hard sell that took nearly three years to complete. In downtown San Diego, the Japanese, in addition to owning the Great American building, are partners in the Emerald-Shapery Center on lower Broadway, due for completion in 1990; the Japanese are financing the construction of Symphony Towers at Seventh Avenue and B Street; and Walt Smyk’s main equity partner in the Meridian condominium tower at Front and G streets is Japanese businessman Kazou Inamori, a long-time friend of the developer’s.
San Diego is a secondary market for the Japanese, according to Kilroy and other businessmen. The Japanese have turned to San Diego after acquiring many of the prominent high-rises of San Francisco and Los Angeles. Two of the most famous buildings in L.A., the Arco Towers on Figueroa, were purchased by the Japanese firm Shuwa for $640 million in the early 1980s. San Diego’s downtown, which had been deteriorating for decades until the late 1970s, was undervalued compared to land prices in Los Angeles or San Francisco.
“Raw land downtown was sometimes valued 500 percent below what downtown land sold for in Los Angeles, but rental rates in the existing buildings was only 10 to 15 percent below rental rates in L.A.explains Sandor Shapery, lead partner in the Emerald-Shapery project. This discrepancy in value attracted many developers, including the Japanese, who had a distinct advantage over Americans.
The Japanese can operate with a much smaller profit margin than American developers, says Kilroy. The prime lending rate in Japan is only three and one-half percent, and profit margins for major projects in Japan are typically five or six percent. But American companies must labor under a prime lending rate of ten percent, and they need a profit margin close to that. Plus, the Japanese make extremely long-range plans, so they can afford in the long term to acquire a building that may not make them any money for a few years. And finally, Kilroy says that Japanese firms have an incentive to build and prosper outside Japan. “Japan is almost built out,’’ he explains. “The major construction projects in Japan now are mostly public-works projects — highways, airports, that kind of thing. The Japanese government is interested in maintaining a favorable balance of payments with other countries, so the more money these big development companies bring in from outside Japan, the more favorably they’re looked upon by the Japanese government, which awards the contracts for the public-works projects.”
ABLE TO LEASE TALL BUILDINGS
A skyscraper without tenants is like a Pez dispenser without the Pez: a Goofy, Daffy, Mickey Mouse investment. Only one case in point is needed here, that of First Interstate Plaza. Located at Fourth Avenue and B Street, the 23-story high-rise was completed in 1985 and immediately became one of downtown’s most distinctive — and exclusive — properties. In fact, it was so exclusive that downtowners preferred to ogle it rather than move into it. It remained only 40 percent occupied for nearly three years, until the Koil Company bought it and marketed it aggressively. Just filling up the building was worth about $40 million to Koll, which owned it for only a year.
Ownership records reveal that the Koll Company purchased First Interstate Plaza in October 1986, for about $89 million. The building, developed by the partnership of Denver-based Bowlen Holdings and the Great-West Life Assurance Company of Canada, cost approximately $80 million to build. This included the $4.4 million the partnership paid to the Alessio family for three-fourths of the block on which the high-rise stands, a manifestation of the trend showing a decline of local ownership of downtown property. For Bowlen and Great-West, a profit of only $9 million after years of development was not a return to boast about.
But the Koll Company has plenty to boast about. “These buildings sell based solely on what their income is," remarks Mike Peckham, asset manager for the Koll Company in San Diego. After filling the building to almost 90 percent occupancy, Koll received an offer from the Equitable Life Assurance Society of the United States for $130 million. Koll accepted, and the deal was consummated in December of 1987; it represented the most ever paid for a single building in San Diego. A year’s work, a $40 million paycheck.
SAN DIEGO: THE FINAL FRONTIER
“Downtown San Diego appears to be virgin territory in the cycle of growth in California," observes Steve Hess, operations manager for LaSalle Partners, the majority owner of both the Wells Fargo Bank building and the Coast Savings tower on Broadway at Second and Third avenues.
“But what’s missing here is the demand for office space that exists in Los Angeles, so you have to be more discerning about your target properties. There’s no question the demand will change in La Jolla and North County, but will it change downtown?’’
LaSalle is gambling that it will. Hess believes that LaSalle’s two buildings are in the best location downtown, notwithstanding those on the B Street corridor. “We’re really in the center of town now, because of the growth marching down Broadway,’’ he says.
Farther down the street are the 21-story Koll Center, across from the multitiered, 18- to 30-story Emerald-Shapery tower, both under construction. Another Koll building is slated to go up on the southwest corner of Broadway and Kettner, across Broadway from the $200 million Great American Plaza, which is due for groundbreaking next spring. Then there are the future Santa Fe developments and the navy’s long-term proposal to develop its prime holdings near the Broadway Pier. San Diego's historical town center of Fifth and Broadway is definitely being moved closer to the bay waters.
Hess spent a couple of years with LaSalle in San Francisco before coming south, and he developed a broad view of West Coast urban dynamics.
"San Diego was a spot on our % map effective 1985," he declares. "San Diego has very impressive numbers, in terms of employment growth, regional growth product, and unemployment, as good as L.A.'s and Orange County's. Commercially, there’s no question San Diego is a bargain, and residentially, we’re a relatively better deal than L.A., San Francisco, and Orange County." LaSalle bought into San Francisco's Crocker Center (now Pacific Telesis Center) in San Francisco in 1985, as well as the Union Bank building and Crocker Plaza in Long Beach. Hess says the company is looking for more properties in San Diego, in addition to the Wells Fargo and Coast buildings. "We're not selling," he says. "We're here to stay and play. If we wanted to sell, we would have already; we’re approached often.” Regarding a rumor from a good source that a Japanese firm recently offered to purchase the Wells Fargo building for a more than generous price (in the $150 million range), Hess demurs, saying he has no knowledge of such an offer.
LaSalle, like most other big-money players in urban real estate, is primarily interested in “signature” properties. Many of these have already been purchased by the Japanese in San Francisco and Los Angeles, and San Diego is the last remaining major city on the West Coast with the land available to develop such properties. “San Francisco is attractive,” says Hess, “but overall it isn’t a magnet like Los Angeles. San Francisco has peculiar politics and a moratorium on commercial growth. Plus it’s completely unionized, which raises the cost of owning property and running property. San Francisco’s a watch-and-see now. But San Diego is a new market, with 1.3 million square feet of new office space coming out of the ground. San Diego is the last frontier of growth in California. The big outside players, Tishman Speyer Properties, Tishman West, Equitable, LaSalle, the companies that have access to very large sums of money, access to the pension funds, they’re throwing their chips on San Diego’s table and saying, ‘Let's see how it goes.’ ”
A FEW OF THE BEST LITTLE HIGH RISES IN SAN DIEGO
There are only two high-rises downtown that are owned by individuals and not by corporations or banks: the Meridian condominium tower and the Chamber building, both owned by developer Walt Smyk with limited partners. The Meridian, about 70 percent sold out, will eventually be owned by its 170-odd tenants, and the Chamber building, at 110 West C Street, according to Smyk, is "a nice little pump handle" that keeps money flowing. Like every other owner of downtown high-rises, Smyk is often approached by brokers representing interested buyers. But he says the building is not for sale. He won’t say how much he paid for it in 1977, calling the figure "embarrassingly low because it was only 44 percent occupied at the time.’’ As this far-from-comprehensive survey of high-rises shows, downtown land values have escalated so sharply in the last few years that no individual, short of a Donald Trump or a Japanese industrialist, is capable of buying a San Diego skyscraper today.
Bank of America building
450 B Street, 20 floors, completed 1982 Original cost: $25.7 million, built by B of A Sale price, October 1984: $45 million, to One San Diego Associates, an investment syndicate put together by E.F. Hutton out of New York City
Union Bank building
525 B Street, 22 floors, completed 1969 Original cost: $20 million Sale price, May 1988: $51 million, to Tishman Speyer Properties of New York
101 Ash Street, 21 floors, completed 1966 Original cost: $11 million Sale price, June 1975: $20 million, to New England Mutual Life Insurance Co. of Boston, Massachusetts
Bank of California Plaza
110 West A Street, 18 floors, completed 1971 Original cost: $9.6 million Sale price, December 1986: $36 million, to VMS Realty Partners of Chicago, Illinois
(formerly U.S. National Bank Building)
101 Second Avenue, 25 floors, completed 1963 by C. Amholt Smith Original cost: $11 million Sale price, December 1986: $45 million, whole block including Executive Hotel, plus nine-story office annex, to Jerrold Wexler of Chicago, Illinois.
First Interstate Plaza
401 B Street, 23 floors, completed 1985 Original cost: $80 million Sale price, December 1987: $130 million, to Equitable Life Assurance Society of the United States
Great American building
600 B Street, 24 floors, completed 1974 Original Cost: $24 million Sale price, 1983: $50 million, to Kowa Real Estate Investments of Tokyo
Imperial Bank building
701 B Street, 24 floors, completed 1982 Original cost: $65 million, still owned by developer Trammell Crow Co. of Dallas, Texas, and Metropolitan Life Insurance Co. of New York. Company spokeswoman says the building is "not for sale.”
IT AIN’T THE SIZE, IT’S THE STYLE
While the big boys were discovering that Palookaville was ripe for the picking, there were also plenty of little guys interested in building or rehabilitating smaller, more architecturally interesting structures. Frank Raymond, the transplanted Chicagoan behind the Bristol Square project on F Street at First Avenue, and Dan Whitaker, who developed 350 West Ash, are two such men who could not build skyscrapers, so they substituted style for size.
Raymond’s seven-story, $10.8 million office building evokes an earlier time with its arched windows, a domed tower, fancy cornices, and wood pillars in the lobby. It was designed to complement the Senator Hotel building, which perches next door. Unlike the big-money men who based their moves into San Diego on market research, Raymond says, “I kind of backed into it. It wasn’t necessarily a business decision."
Raymond "fell in love with this town in 1959," on his first visit to San Diego. But his career as a real estate developer in Chicago kept him in the Midwest until 1984, when he moved his family into a home he'd built on Country Club Drive in La Jolla. He was still working in Chicago but decided he needed something to do in San Diego, and he started looking for a piece of land to develop. "I look for an opportunity and then jump in," he explains. "I thought downtown was on the verge of booming in 1984; the Pacific Rim, population growth, the warm weather, it all added up. We didn’t analyze the market with computers or anything. Like my wife says, I follow my nose and listen to my gut" The building, opening in December, is about half leased.
Dan Whitaker’s 12-story midrise, known by its address, 350 West Ash, is about 90 percent leased and opens in January.
Whitaker, who has lived in San Diego since he was seven years old, points out that the current spate of office construction downtown will not result in the glut of office vacancy that existed here after
the last generation of new buildings opened up in 1982. Back then, San Diego had the highest vacancy rate in the country, but now downtown vacancy is a tiny eight percent. Whitaker says the new buildings won’t create such a deluge of empty offices because now lenders require a substantial amount of pre-leasing before they will free up the money to begin construction.
Whitaker, who has developed other properties on lower Laurel Street and on India Street downtown, commissioned Cleo Architecture and Design to come up with a distinctive building that could compete with the sophisticated offerings going up all over the urban core. "I get tired of looking at glass boxes,” he says. “With smaller buildings and smaller lots, why not do something interesting?” Like Raymond, Whitaker is looking for more developable land downtown.
“But the club is becoming a little more exclusive, with bigger and bigger wallets,” he observes of downtown players. “The bigger developers are coming from the outside because of the economy. When you're outside the city, you can see the opportunities; the locals saw downtown as dying, because that’s what was happening for so long. It’s obvious that pretty soon there won’t be any more room to build, so people are jumping in while they can.”
Whitaker says that downtown’s true entrepreneurs are not the big guys coming in now with pension fund money behind them, but the little guys like himself, Raymond, and the long-suffering owners of property in the Gaslamp Quarter: Chris Mortenson, Dan Pearson, Bud Fisher, and Jim Watkins, the developer of the Horton Park Plaza Hotel in the old Jewelers Exchange Building at Fifth Avenue and E Street. Whitaker is convinced that the Gaslamp Quarter, the 16-block area south of Broadway that has gobbled up $13 million in public-funded improvements while it became an elephants’ graveyard of failed enterprises, will finally be saved by the new convention center. Ironically, in this version of Gaslamp's salvation, it is not San Diegans — who own most of the area’s 146 buildings — but outsiders, the one million conventioneers expected to visit each year, who will revitalize the district. “Gaslamp lies between the convention center and the rest of downtown,” Whitaker reasons. “The people of San Diego are still hesitant to go down to the Gaslamp; they see a guy lying on the street and they never return, but people from other cities aren’t like that. They’re more used to urban environments.”
ON THE BLOCK
What many downtowners believe to be the most valuable block in town also happens to be one of the cruddiest. The block bounded by Third and Fourth avenues, B and C streets, contains the old California Theater, a strip of modest eateries, a gargantuan expanse of asphalt parking lot, and a quickly deteriorating former First Interstate Bank branch that is plastered with For Lease signs. But what makes it so valuable is its location: directly across Fourth Avenue from the high-class First Interstate Plaza, across Third Avenue from the Community Concourse and city hall, and bounded by the San Diego Trolley tracks on C Street, the block is severely underutilized by modem urban standards.
“We think it's the best block in town,” remarks attorney Jim Hall, who manages three parcels of downtown property that are part of his family’s trust, including the 10,000-square-foot parking lot at Third and B, which is leased to Ace Parking. Hall thinks a high-rise would be the best use of the block, and evidently many other people agree with him. Compared to B Street, which is forested with spiffy high-rises,
C Street is a grimy patchwork of empty storefronts, graffiti, and shoestring enterprises that the trolley was supposed to remedy. The street awaits an anchor project, and the California Theater block is the logical place for it. “We’ve been approached regularly by a variety of developers,” Hall declares. “A Japanese group wanted to buy the block last summer, but we said it wasn’t for sale.”
Complicating any future development of the block is the fractious ownership of the parcels. In addition to the Hall family, other owners include the Evans family, which owns the Bahia and the Catamaran hotels on Mission Bay; former port commissioner and sometime gadfly Harvey Furgatch; and eight different entities that were bequeathed shares of ownership in the estate of A.W. Coggeshall, the deceased eccentric who owned the California Theater. These include the San Diego Community Foundation (which received seven-twelfths of the estate), the San Diego Rowing Club (one-twelfth), the University of California (one-twelfth), the University of San Diego (one-twelfth), the San Diego Crew Classic (one twenty-fourth), the American Cancer Society (one twenty-fourth), Children’s Hospital (one twenty-fourth), and the National Multiple Sclerosis Society (one twenty-fourth).
The California Theater property is being administered by the trust department of California First Bank. A spokesman for the San Diego Community Foundation says the bank charges an exorbitant fee for handling the property, and one option under consideration is the formation of a partnership including all the beneficiaries, which would take the property out of the bank’s control. Another possibility is that the Community Foundation would take over ownership of the theater in exchange for signing over to the other beneficiaries its seven-twelfths interest in the rest of the Coggeshall estate. It seems obvious that a developer endeavoring to use the entire block for a high-rise would have a difficult time buying out the theater, much less the empty bank building (owned by the Evans family) or the parking lots (owned by the Hall family and Furgatch, among others). “There’s lots of talk about that block, but no action,” Hall comments.
STUCK IN TIME
Time was, the center of downtown was at Fifth and Broadway. The Walker Scott department store occupied the stately Holzwasser building at the northwest comer. The eight-floor structure, constructed in 1919, was at the hub of the old business district. To the north, at Fifth and C, was Marston’s department store. In the next block up Broadway was the ostentatious San Diego Trust and Savings Bank; the next block down Broadway was occupied by the dignified U.S. Grant Hotel. One block to the south, at Fifth and E, was San Diego’s first skyscraper, the ten-story high-rise built in 1913 that originally housed San Diego Trust and currently functions as the Horton Park Plaza Hotel. But now the urban history that swirled around Fifth and Broadway is a major reason the center of town is shifting to lower Broadway. Two buildings on that corner, the Holzwasser and the Granger building, completed in 1905 on the southwest corner, have been designated as historic sites and therefore cannot be demolished. Even if the relics could come down, the downtown traffic circulation plan prohibits making any curb cuts in that part of Fifth Avenue, which means underground parking is out of the question. Progress has had to leapfrog past Fifth and Broadway on its way toward the bay.
Bud Fisher, a diehard Gaslamp Quarter developer, owns the five-story Granger building and just finished a $1.5 million refurbishing of it. The Holzwasser, most recently used in Monte Kobey’s abortive effort to establish his swap meet downtown, cries out for a similar restoration job. Its owner is a partnership headed up by Chuck del Valle, which purchased it for $2.5 million in June of 1983. “We wouldn’t sell it for less than $5 million today,” del Valle says. It is on the market. If a sale doesn’t materialize, del Valle says his group will upgrade the building.
Before the structure was designated by the city as a historic site last April, del Valle says he wanted to build a high-rise on that corner but was stymied because he couldn’t buy out the properties surrounding his building. To the west, on the comer of Fourth Avenue and Broadway, is the trashy-looking Thrifty Drug store, and beside that is Miller's West clothing store. The four-story building housing those stores is owned by the U.S. Grant Foundation, which also owns the two-story building to the north of del Valle’s on Fifth Avenue, occupied by a Price Breaker’s discount clothing outlet. The foundation, which no longer owns the U.S. Grant Hotel, purchased both properties in 1952. An employee of the Wells Fargo Trust department, which administers the properties, says it's fully leased and not for sale. She adds that a large number of beneficiaries of the foundation are involved in deciding what to do with the buildings.
A former board member of the foundation says that "it’s good income property with short-term leases until something happens on that block.” He’s certain that someday the block surrounding the historic Holzwasser building will give rise to new structures. “It has to,” he explains. “When I got on that board ten years ago, land was available downtown for 20 dollars a square foot. It’s going for over 100 dollars a square foot now. Property owners almost can’t afford to not develop their holdings.”
AN OLD GUARD
In 1976 Tom Horn paid $6.50 a square foot for the block bounded by Seventh and Eighth avenues, K and L streets, on which he later opened the Farmer’s Bazaar. He says he doesn’t know what it’s worth today, but other property owners south of Market Street have recently sold their properties for about $60 a square foot. Horn, whose family owns almost 300,000 square feet of property downtown, mostly in the Gaslamp Quarter or thereabouts, is in no hurry to sell the Farmer’s Bazaar block. “We’ll develop it when we get around to it,” he says confidently.
Horn was born downtown in 1927 in an apartment building at Third and J, in an area that used to be called Chinatown. Now there are only remnants of the old Chinatown left, but the Horn family continues to prosper. In addition to the land they own at Eighth and L, in the shadow of the ascending convention center, the Homs have owned and operated David Produce on lower Sixth Avenue since 1918; they’re completing a 192-unit single room occupancy hotel (SRO) on Twelfth between Broadway and E Street; they’ve broken ground on another SRO at Ninth and F, where they operated a gas station until last year; and they own the building housing the Far East Trading Company at Fifth and E.
The Homs are among the few old-guard San Diego families whose downtown holdings have passed through generations. The Hall family was another one, established by real estate developer Michael Francis Hall, who came to San Diego in 1887. His heirs now oversee three remaining downtown parcels, including about one-third of the valuable block bounded by Third and Fourth avenues, between B and C streets, as well as a lot at Fourth and Ash and the old Broadway Theater between Eighth and Ninth avenues on Broadway, abutting the main library. A third family, that of deceased businessman William Evans, at one time owned several downtown parcels but now retains only the Old Cabrillo Square apartments at Ninth and Ash and the empty bank building at Fourth and B.
Hom says that as more outside investors build and buy high-rises downtown, there’s a natural erosion of “local pride of ownership," but it creates a bigger tax base as it produces more value in the land. Unfortunately, higher land values make it more difficult to build residential property without government subsidies, and many downtown leaders believe the building boom should be directed more toward residential structure now. “We had a high-rise apartment house planned for a piece of property at Ninth and F, across from where we used to run the gas station," Horn says, “but since CCDC has subsidized so many apartment houses, we didn’t feel we could make much money on it [without subsidization], so we decided to hold off." Horn says that SROs — which are much less expensive to build than apartment houses — are now the most profitable residential structures to build downtown, a fact that may have a far-reaching impact on downtown population dynamics.
The Chicago Title Company, Walsh and Chacon Commercial Real Estate, and the San Diego Daily Transcript provided valuable source material for this article.