SAN DIEGO—In order to maintain its viability and desirability as a 21^st-Century city, San Diego needs high-level investors and developers such as REITs to bring their expertise and capital to Downtown, JLL's EVP Bess Wakeman tells GlobeSt.com. After the firm's recent skyline report for Downtown San Diego revealed that these office buildings contain the most expensive office space to rent Downtown, we spoke exclusively with Wakeman about skyline-office-rent trends and development activity in the submarket.

GlobeSt.com: How do skyline office rents generally fluctuate based on the economy?

Wakeman: The Downtown San Diego skyline-building set represents 20 class-A and –B high-rise office projects totaling 7.4 million square feet. These buildings truly drive the market since leasing activity within the skyline buildings accounted for nearly 60% of all signed deals in Downtown San Diego in 2014. That percentage jumps to 74% based on total square feet leased—meaning that not only do skyline buildings sign more leases, but also the deal size is larger than those transactions that occur in Downtown overall. Even in a down economy, skyline rents are typically the first to rebound from fluctuations in the economy. In fact, in 2014, direct asking rents increased by 4.7% year over year. Moreover, direct vacancy in the skyline dropped 390 basis points and was at 13.2% in the first quarter of 2015.

GlobeSt.com: What are the challenges Downtown San Diego developers face with larger projects?

Wakeman: Many of the challenges facing Downtown San Diego office development are not unique to Downtown: it's difficult to achieve pre-leasing thresholds; rents, while on the rise, are still not at levels to justify new construction; and residential developers are willing to pay more for land and can get out of the ground sooner. Financing is also a concern Downtown since many of the companies that are in need of space are startups who don't have the blue-chip credit lenders require to finance office-development projects. Timing is also an issue. The essence of startups has more to do with innovation, scalability and growth. When startups need space, they need it immediately—they can't wait two to three years for a building to get built. Tenants are in the market today, but the buildings don't exist to accommodate them. Because of this, the office development Downtown has primarily been limited to build-to-suits—such as the new 16-story Sempra Energy corporate headquarters that will deliver later this summer.

GlobeSt.com: Aside from East Village, in what other parts of Downtown are there development or redevelopment opportunities?

Wakeman: It's hard to have a conversation about development in Downtown San Diego without talking about East Village. With the multifamily boom that has occurred, this area is really maturing and is becoming the darling of Downtown. Once considered a “pioneering” location, East Village is gaining momentum over the conventional high-rise towers along Broadway.

East Village's 35-acre I.D.E.A. District, bounded by 6^th Ave., Market St., 11^th Ave. and 17^th St., is a new employment center built on the pillars of innovation, design, education and the arts. Within the I.D.E.A. District is Makers Quarter, a multi-block proposed development by L2HP. The first Makers Quarter building, the Collaborative Office Hub, will include 50,000 square feet of office and retail space at 15^th and F streets and will start construction next spring.

One of the most creative and exciting redevelopments happening Downtown is at 450 B Tower in the heart of the Financial District. The owners of 450 B Tower are focused on repurposing the existing +/- 50,000-square-foot retail bank branch. In the current plan, which was unanimously approved by CivicSD and dubbed “the poster child for redevelopment,” the existing two-story building will be replaced with a 87,550-square-foot, six-story office tower called C4B. C4B will offer operable windows, floor-to-ceiling glass, balconies and terraces—all features that today's tenants want in their office space. While the Financial District is popular with business tenants, C4B will bring additional retail amenities to the area as well, which will further increase the appeal of this Downtown district.

There is an equally highly anticipated mid-city redevelopment that finally gained some traction last month. The City of San Diego has taken the first step in finding a new use for the old Downtown Central Library building, issuing a “request for ideas.” The 75,000-square-foot historically designated, five-story building at 820 E St. has been dormant for about a year-and-a-half, since the new Central Library opened near Petco Park. Expediting this redevelopment will be pivotal in attracting the universities, start-up companies, life-sciences firms and nonprofits that have all expressed an interest in the location.

On the west side of Downtown in the Marina District, the Department of the Navy tapped Manchester Financial Group to redevelop the Navy Broadway Complex. Encompassing approximately 14.72 acres of premier waterfront land, the complex currently consists of approximately 350,000 square feet of administrative office and 450,000 square feet of warehouse uses. In exchange for the Navy providing the land, Manchester will build the Navy a 327,000-square-foot facility with the balance of the site to include public open/green space, commercial offices, retail uses, parking and other public attractions.

GlobeSt.com: What else should our readers know about Downtown San Diego office development?

Wakeman: A couple of things will need to happen to really spur the level of office development that will be essential for Downtown San Diego to maintain its viability and desirability as a 21^st-Century city: 1. Well-capitalized developers, such as REITs, that have lower financing requirements, will need to bring their suburban development expertise to Downtown; and 2. San Diego, at least not yet, doesn't have an equivalent to Paul Allen, who started the renaissance of Seattle's South Lake Union or a Tony Hsieh, CEO of Zappos, who has pledged $350 million to attract startups to Downtown Las Vegas. Hsieh is personally funding the infrastructure improvements necessary to rebuild Downtown Las Vegas. It is crazy that this beautiful, vibrant waterfront city still struggles with office development. Can you imagine the imprint that a visionary like Allen or Hsieh would have on Downtown San Diego?