The Use Trend That's Growing in SD

SAN DIEGO—Adaptive re-use is the order of the day in San Diego for developers looking to breathe new life into older buildings by converting them to residential, HFF's senior managing director Tim Wright tells GlobeSt.com. As GlobeSt.com reported last week, the Gas & Electric Headquarters Building—San Diego LP, an entity controlled by Shapery Enterprises, has secured $30 million in financing for 101 Ash St., a 21-story office tower located in the Broadway Corridor of Downtown San Diego. The loan will go toward repositioning of the 347,087-square-foot tower after the lease of its sole tenant, Sempra Energy, expires mid-year. Wright led the team that providing the loan for the borrower; we caught up with him to discuss the deal and the types of uses that are most common for loans in the San Diego market.

GlobeSt.com: How did this deal stand out for you?

Wright: It was a property that has not been available around the market for a while. Sempra has been in there a long time, and it's an iconic building used as Sempra headquarters. It's in a neighborhood that for the last five to 10 years has really taken off—the south end of the Little Italy district. It's also a unique building in its configuration.

GlobeSt.com: How would you characterize the financing market for San Diego office properties?

Wright: It's very strong and has enjoyed a lot of attention from a wide group of investors, including life companies, CMBS lenders and banks. The debt market here, as well as the equity market, still has some room to go with respect to rents and valuations.

GlobeSt.com: What types of usage are most common for loans in this market: acquisitions, refinancing, construction or some other use?

Wright: Most have been acquisition loans, followed by refinancing. A number of Downtown buildings have been picked up in this cycle by investors using acquisition financing, but refinancing is also growing.

GlobeSt.com: Are underwriting standards for office properties here changing? If so, how?

Wright: Lenders are more upbeat about the prospect of re-leasing than they were a couple of years ago, so they are a little more aggressive on transitional property. 101 Ash will be vacated this summer, and lenders are more understanding now about large, single-tenant rollovers.

GlobeSt.com: What other trends are you noticing about the market?

Wright: Adaptive re-use is growing. We're starting to see people looking at office buildings in good locations and evaluating a change of use specifically toward residential. We were involved in a couple of projects—one Downtown and one in North County—where the buyers were looking at older, but very well-located buildings and starting to scratch their heads to see if they can work as residential properties. Change of use is being evaluated on some products in strong locations, unlike the last cycle.