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New Tech Companies, Old Buildings and the Downtown Space Jam

Class A office space has suddenly become a limited commodity throughout the city’s urban core. A project on the frontier of East Village gentrification, the IDEA District, promises to solve a lot of this. But it needs tenants before it can get off the ground.

Between 8th and 9th avenues and J Street downtown, there’s an empty space on the bottom floor of the TR Produce Building.

Jason Kulpa, CEO of Underground Elephant, an enterprise software company that provides companies a platform to generate sales leads, wants to put his 85 employees — and many more he wants to hire — there, but the city won’t let him. The issue: He doesn’t sell food or beer.

He will need special permission, and that will take time.

Downtown boosters have been talking up the city’s central core as a garden where tech companies should plant their seeds. But Underground Elephant’s struggle to move into an attractive, funky space is one angle on a bigger problem with that dream: Downtown doesn’t have the space or the old buildings that seem to have captured young entrepreneurs’ imaginations.

In fact, Class A office space in general has suddenly become a limited commodity throughout the city’s urban core.

At the same time, a much-anticipated project on the frontier of East Village gentrification, the IDEA District, promises to solve a lot of this. But it needs tenants to persuade lenders to pay for construction. It’s finding it hard to get tenants to sign up.

There’s a run on funky office spaces.

Landlords love restaurants and so does the city.

The city collects sales tax from restaurants. The city also wants to create foot traffic and a sense of community on once barren or scary streets.

If they have a good location and can find a restaurant to lease it, landlords often can collect not just rent but everything else it costs to own a building — the restaurants pay utilities, janitorial and other fees.

But an economy can only take so many restaurants and East Village, with very few major employers and many restaurants, seems to have hit its limit. Sempra is building its own corporate headquarters nearby and that may have an impact.

So places like the TR Produce Building remain vacant on the ground floor.

Photo by Sam Hodgson

Photo by Sam Hodgson

At the same time, this area around the ballpark has become an attractive place to some entrepreneurs.

Jason Hughes, CEO of Hughes Marino, a commercial tenant representation firm, said everyone wants to be in a creative, funky office space fashioned out of an older building.

“There are a couple odds and ends here and there but they have giant price tags because they’re looking for bars and restaurants that will pay it,” Hughes said. (Full disclosure: Hughes Marino is a sponsor of Voice of San Diego, and my wife works for the firm.)

“I keep hearing experts talk about all this tech moving to East Village, but the reality is that there’s very little product,” Hughes said.

So that leaves those vacant retail spots.

And it was one of those that caught Kulpa’s eye. Underground Elephant just signed a big contract with Allstate Insurance and plans to grow to 200 employees.

Kulpa managed to make a deal with the landlord of the space on J Street.

One of the parcels Kulpa wanted was already leased to Walmart, which had planned an urban store but ditched the idea. So Kulpa made a deal to sublease that from the retail giant as well.

He methodically put it all together.

But none of that was harder than the deal he has to make with the city.

The downtown community plan calls for retail in that space. Permitting is managed by Civic San Diego, the agency that used to be known as the Centre City Development Corp. Getting an exception — a so-called conditional-use permit — requires several approvals and a public hearing. If those approvals are appealed, it means further delays. The stress has led Kulpa to threaten to move the whole company to Austin or San Francisco.

“We need to be in a space that’s desirable for young talent. We’re in need of software engineers and they’re very hard to find in San Diego. The new office will help, but Civic San Diego is putting up the roadblock with these ancient processes,” said Stacy Mendes, the Underground Elephant manager in charge of the move.

The approval isn’t guaranteed. Laura Garrett is chair of the Downtown Community Planning Group, which gets first say on Underground Elephant’s request. If her group isn’t happy with it, it won’t be able to kill the permit but it wouldn’t be helpful.

“I understand not wanting a sterile cubicle farm in a high-rise, but I’m surprised/disappointed there aren’t other options for them,” Garrett told me in an email.

Andy Taylor, a commercial broker with CBRE, had to recently manage a similar issue with his client, Red Door Interactive. Red Door (whose CEO, Reid Carr, sits on Voice of San Diego’s board of directors) wanted to move into the ground floor of the DiamondView Tower, right here next to the ballpark.

The city wouldn’t let it happen unless Red Door left part of the space open for retail.

That retail space is still vacant. BumbleBee Tuna just moved its headquarters into the old Showley Candy Factory building at Petco Park — a space that was also designated for retail. Yes, BumbleBee had to get special permits.

Taylor said the run on these creative spaces is fierce.

“They want to be in a space that’s rehabbed for them but there’s not a lot of landlords who can make that happen — put a boatload of money into a building and then command a high enough price to make sure it makes sense,” Taylor said.

As for Underground Elephant, a representative for the mayor’s office told me it would be five to 10 weeks before the company knows whether it can move.

Everyone from the mayor’s staff to Civic San Diego and the San Diego Downtown Partnership assured me this should be seen as fast in the world of city permit approvals.

There’s no room downtown for tech.

In its Imagine Downtown vision, the San Diego Downtown Partnership proclaimed that downtown had to blossom into a tech cluster.

“While the San Diego region has long been known as a hotbed of innovation, we must begin to forge a tech startup culture to Downtown,” the document reads. “Our urban center is the best place to provide the concentration and community needed to build a thriving tech ecosystem … ”

In an email, Kris Michell, CEO of the Downtown Partnership, said she felt like Civic San Diego was going to approve Underground Elephant’s move and that downtown property owners are thinking up new spaces to attract tech companies.

“In the short term, we need to look at non-traditional spaces such as the old downtown library and work to turn them into viable, low-cost co-working spaces like those that exist in other cities,” she wrote.

Hughes sees a bigger problem and he said he thinks a vibrant East Village, apart from the area immediately around Petco Park, is still a decade away.

“Unfortunately, downtown doesn’t have lots of cool old-building options like San Francisco and other cities. We have very little product – and out of that small inventory – even less of it is any good,” Hughes said.

The real story, Hughes said, is in the disappearance of Class A office space, the nicest spaces in the best locations.

Hughes provided this sampling on downtown Class A space.

Symphony Towers, 750 B St.: currently 5.3 percent vacant (and many of the vacant suites are in active lease negotiations). In 2011, 2012, and 2013, this building was 36.3 percent, 25.0 percent and 13.5 percent vacant, respectively.

One America Plaza, 600 West Broadway: currently 15.7 percent vacant. The Department of Justice is in final lease negotiations to take six floors. That would reduce the vacancy rate to under 3 percent.

DiamondView Tower, 350 10th Ave.: currently 7.8 percent vacant and there are only two options available, aside from the ground-floor retail space. Rates are the highest in downtown.

Wells Fargo Plaza, 401 B St.: currently listed at 11.6 percent vacant, but there are negotiations on vacant suites in the building, bringing the “real” vacancy rate closer to 9 percent.

Koll Center, 501 West Broadway: currently listed at 4.4 percent vacant – but within the next 30 days, that vacancy rate will likely drop to less than 3 percent.

Hughes’ rival, Jones Lang LaSalle, reports a 12.7 percent vacancy rate for Class A space downtown.

The Downtown Partnership points to successes in the effort to provide work spaces for startups and technologists — places like the startup incubator EvoNexus and the open workspace Co-Merge. (Co-Merge has also been a sponsor and partner of Voice of San Diego.)

But Underground Elephant and Red Door Interactive are not startups just clawing their way into a market or proving a new technology. They’re not hunting for a place to make some calls.

They are now established companies with reliable revenue.

They’re the type of places the IDEA District is trying to attract.

Correction: They’re the type of company’s the IDEA District needs to attract. So far, it has failed.

What is the IDEA District?

Besides the dormant Navy Broadway project, no dreamy commercial development effort has been as talked-about as the IDEA District.

You know this guy:

Photo courtesy SD Metro

Photo courtesy SD Metro

That’s Jerry Navarra, of Jerome’s Furniture, and his son. His family has long owned land in what is being called Upper East Village. The IDEA District is basically just an idea to turn this into great work spaces and a walkable, exciting place.

Here’s the area they’re talking about.

Images courtesy of IDEA District

Images courtesy of IDEA District

And what they hope it will look like in a few years.

Aerial-View-1030x572

It’s an idea packaged as a warning.

“In the race for talent, San Diego has to work harder at growing an urban environment that has it all or we are going to have a difficult time maintaining, much less growing, the jobs and prosperity of our region,” the promotional site explains.

Yikes. (I was gratified to see they include media among the disciplines that fit in a “technology and design cluster.” Others eligible include product design, industrial design, advanced engineering, medical wireless, infographics, biomimetic design, graphic design, video gaming, 2-D to 3-D animation and post production.)

Actually, it’s a design and development plan for about 60,000 square feet.

The IDEA District is banking on the same thing the Downtown Partnership is hoping for: one big company to move in. The Downtown Partnership’s surveyed thousands of people and held several meetings to produce a vision document. Getting this big company to plant its flag downtown is crucial, the document says.

“Attracting a major, well-known tech tenant in Downtown will serve as an ‘anchor’ for other companies to follow, grow and prosper,” it says.

And the IDEA District is no less insistent on that:

“The single most significant catalyst will be the move of a major design+technology company into the District. Once a highly respected company takes a significant chunk of creative office space, many satellite businesses will follow,” the site says.

Whether it is this type of company or a bundle of others, someone has to sign up for the IDEA District to get started.

“A very large tenant is going to have to come in and pay some of the highest office rates in San Diego County to be in East Village,” Taylor told me.

And that isn’t likely, said Hughes.

“They’re trying to kick off mixed use in the Idea District and Maker’s Quarter but they’re having a hell of a time finding tenants. It’s still a bit of a no-man’s land out there,” Hughes said. His heart is elsewhere right now (to the west, more specifically). He just announced he has tenants lined up for the beleaguered Navy Broadway project being developed by Doug Manchester, the owner of U-T San Diego.

The skepticism about East Village is familiar to Frank Wolden. Wolden is an urban designer and principal at Skyport Studio, who’s helped develop downtown for several decades.

“I can remember 15 years ago when the attitude expressed to me was that you will never see anything develop east of 6th Avenue,” Wolden said. “This area of East Village is not unlike what the Marina area and Horton Plaza were like before those areas saw improvements. It was hard to imagine how those would work but they did.”

One of the guys trying to make the IDEA District happen is David Malmuth. He says things are going great. They plan to announce a tenant soon for 6,000 square feet, about 10 percent of what’s available.

Malmuth and his partners need tenants to sign on so that they can get financing to start construction. He says he’ll lock down all the financing in the next 30 days.

“In order to become a cluster for technology and design-oriented companies, we need more creative office space,” Malmuth said. “We’re seeing nothing but support. Now it’s up to us to find those tenants looking for a great culture.”

When I asked whether Malmuth faced a deadline, a do-or-die moment when he might have to fold without going forward, he said no. It was going forward, he assured me.

The IDEA District is just an idea. There’s no subsidy to entice businesses to move there. In fact, just the opposite: It will be expensive. There’s no centerpiece attraction, like the ballpark or waterfront.

If downtown is to become the tech hub its leaders say it must be, that idea will have to be enough. Otherwise, companies like Underground Elephant will keep trying to take spaces the city wants for restaurants until they’re all gone.

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