Reflecting on an Urban Miracle

By Alan N. Nevin

Why other cities aren't duplicating Downtown San Diego's success.

San Diego's remarkably vibrant Downtown is really a major miracle. As part of my firm's consulting practice, we conduct studies in the downtowns of most of the Western and Southwestern metropolitan areas. It is no secret that not one of these has pulled off what San Diego has. Not San Jose, not Irvine, not Phoenix, not Sacromento, not a whole bunch of places that would like to emulate Downtown San Diego. Most of those places have far more downtown office space and employment than San Diego does and many have ballparks, too. But for some reason the fire has not been ignited.

While it is hard to avoid the appearance of bragging about Downtown San Diego, I want to marvel at the amazing efforts of the development and finance industries that have risen to the occasion and taken the risk to make the redevelopment of Downtown happen. Since 2000, remarkable risk takers like John Moores, Nat Bosa, Keith Fernandez of Intracorp, Doug Wilson, Joe Werner of Intergulf, Dene Oliver and Jim McMillan of Oliver-McMillan, Mike deCotiis of Pinnacle International, and a host of truly gutsy individuals have made it all come true.

In that time frame, more than 5,000 condominium and rental units have been built and occupied. That is twice the number of market-rate units that existed prior to 2000. Better yet, another wave of constuction is under way that will add 2,000 more units by the end of 2007. Look at the holes in the ground: Electra, Icon, The Mark, Park Terrace and Smart Corner to name a few. And there are rentals underway, too, like Oliver-McMillan's G Street Lofts and Hanover's Firenza.

Back to condominiums: The market has been absorbing more than 1,000 new condos annually. Virtually every new project has been sold out prior to construction. Most of those now under construction are selling well. Don't forget the hotels. While they are, by nature, extremely difficult to finance, since 2000 San Diego's Downtown has added the W Hotel, JMI's Solamar, Stanford's Marriott Gaslamp (new Clarion), and is now in the early construction stages of Tarsadia's Hard Rock, Marriott's Residence Inn and Marriott's Renaissance. The open hotels are running full and at full rack rates. Wow. This phenomenon would not have happened without Petco Park, a miracle in its own right. With its Park at the Park and musical and entertainment events, it is the highlight of Downtown and cheap fun, too.

A kind word also is due CCDC. The agency is the catalyst responsible for the parking garages the planning of the parks, the financing that made the infrastructure possible and the effective condemnation procedures that cleared the way for development.

Now let's talk about value: the condominiums in Downtown are not exactly cheap. In fact, they are downright expensive. The good news is that there are more than enough affluent San Diegans to partake in the acquisition of these vertical homes, at least as long as interest rates are modest.

By nature I look at the good side of things. But there is one bit of gloom on the horizon. It has to do with rising construction costs. The main ingredients of most projects Downtown are concrete and steel, two commodities that have been rising in price at an unreasonable pace. The result? Tomorrow's condominiums are going to be far more expensive than today's. In addition, new building regulations have driven up the basic cost of design and getting started. What this means is that for the most part, the first-time buyer will be shut out of future rounds of development in Downtown. In the past few years, it was still possible to produce condominiums for a reasonable cost, but that situation is fading fast. The last hope for affordability lies in several East Village projects that nailed down their costs prior to construction. Thus, Smart Corner, Vantage Pointe and one or two others can still produce units for a modest price.

On balance, the miracle that is Downtown San Diego will continue, albeit probably at a slower pace than in the past five years. In the next few years, we will see the maturity of East Village with its full complement of retailing and services and even a park or two. Look around. Not many downtowns can boast being on the water, being within walking distance of a 1,200 acre park and zoo, having a first-rate ballpark, being five minutes from an airport. And oh, yeah, the weather's not so bad either.

Alan N. Nevin is director of economic research with MarketPointe Realty Advisors (marketpointe.com) a consultancy providing real estate and demographic statistics, feasibility studies and litigation support to the California land use industry and legal professions. Nevin can be reached by e-mail at anevin@sandiegometro.com.

Article provided by Fidelity National Title Company.