Friday, June 10, 2016

San Diego Suburban vs. General Office

(Downtown San Diego)
The San Diego office market has always fascinated me. What's interesting is so much of the office space is located in the suburbs and the Downtown, although very nice just doesn't have that much office space. In fact, before Sempra Engergy built their brand new office tower in Downtown, there really wasn't a major company headquartered there.

When you think of the major San Diego based companies, you probably think of Qualcomm, Jack in the Box, and maybe a biotech like Illumina. It's probably surprising to find out that none of these companies are Downtown.

Qualcomm is in Sorrento Valley which is probably about 15 miles north of Downtown. Sorrento Valley is pretty nice, but there's certainly nothing there that would make it an especially attractive place to work. Scenery isn't that great, not a lot of amenities nearby and infrastructure is pretty awful. Around 5pm it can take 30-45 minutes just to get on the nearby freeway. There's very little in the way of public transportation supporting that submarket to boot.

Jack in the Box is, rather bizarrely, in the Serra Mesa neighborhood of San Diego, which is probably 10 miles north of Downtown. Again, terrible traffic, no amenities, and the surrounding area is old and rundown.

Illumina is in University City, which is about 10 miles north of Downtown. University City is actually pretty awesome. Close to the beaches, great restaurants, awesome scenery, and a very desirable place to live.

I don't know exact percentages, but a majority of office space is located in University City, Del Mar, Carlsbad, Sorrento Valley, with just a small percentage left in Downtown. I'd guess a few factors led to office space being developed in those markets vs. Downtown:

  1. Downtown San Diego, prior to the mid-2000's was kind of a crap hole. It was old, rundown, had a major homeless problem, and wasn't all that desirable of a place to live. Petco Park getting built and a number of city initiatives combined with the urbanization trend have really revitalized the Downtown area over the last 10 years. In my opinion, it's now one of the most desirable and live-able Downtowns on the West Coast. 
  2. C-level executives decide where companies establish offices. Along with having offices in nice locations, they want them close to where they live. Well, in San Diego, C-level executives are likely to live in University City, Del Mar, and Carlsbad. It's then no wonder so many offices are in those locations.
  3. San Diego has a driving culture. In San Diego, you just drive everywhere. No one takes public transportation, People are just used to spending an hour or more commuting each day. I don't have a great explanation for why this culture exists, but it just does. Having offices in suburban locations away from population centers that require substantial commutes just isn't that big of a deal.
Here's an interesting article from Globe St. discussing this exact phenomenon in San Diego. I have one major point of disagreement with the interviewee though when he says: Do you see this amount decreasing as the market becomes more urbanized and the demand for Downtown office space increases?

Brant: I don’t [think] that composition is going to skew more toward urban for San Diego. Downtown is going to grow, but I don’t think that’s going to stop the suburbs from growing. There’s a lot of office proposed for Downtown, but we’ve got over 1 million square feet of office proposed in the Highway 56 corridor alone. I think Downtown will definitely grow, but it’s [not] going to outpace the suburbs.

His thesis that the composition of suburban vs urban office isn't going to change might be correct in the short term, but I think it's going to skew heavily to Downtown in the medium to long term. When you look at Downtown San Diego right now, it seems like every professional between 25-40 lives there. Condos and apartments are being built at a furious pace to keep up with the demand. Not only is the Downtown seeing a boom in the construction of dwellings, but the formerly blighted neighborhoods to the south and east are rapidly being revitalized, largely as a residual effect from the improving demographics of the Downtown area.

When these 25-40 year old yuppies grow in their careers and either start their own companies or move up to the C-suite, where do you think they'll wan their offices? My guess is they've spent 10 or more years living in a gorgeous Downtown, their favorite restaurants are all there, their girlfriend / wife / boyfriend / husband wants to be there, their friends are all there--chances are they're going to want their offices Downtown as well.

This is where demographics trends and household formation come into play as well. You might say these people are going to eventually want to move to the suburbs as they have kids, but the fact is the current trend suggests 25-40 year olds aren't going to have as many kids as previous generations and won't need as much space. A family of 3 or 4 can pretty comfortably live in a 1k SF condo or house. They don't need 4 bedrooms, the huge yard, etc..., allowing these families to remain Downtown.

Long story short, the future leaders of San Diego business all live Downtown and they're going to want their offices there. Don't be surprised if we start seeing major office developments taking place in Downtown to keep up with the demand.

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