San Diego, CA
Is 600 B St. the first of many downtown office buildings to default?
One of downtown’s most visible office buildings is in the foreclosure process after years of lost revenue brought on by work-from-home trends.
The owner of the 24-story office tower at 600 B St. is on the brink of losing the building as the lender seeks to recoup more than $83 million in unpaid debt. It is likely the property will be sold at auction later this year or returned to its lender, Western Alliance Bank, property records show.
The building, whose anchor tenants once included the Union-Tribune, is the first major property downtown to begin the foreclosure process. Real estate tracker CoStar said downtown has a 30 percent office vacancy rate.
While downtown is struggling, San Diego County has one of the lower overall vacancy rates (around 14 percent) in the nation, said Tim Olson, a broker with San Diego-based real estate investment managers Jones Lang LaSalle.
Q: Is 600 B St. the first of many downtown office buildings to default?
Economists
Lynn Reaser, economist
YES: COVID sent people back to their homes to work remotely and they have still not returned to downtown San Diego. The newest space for biotech remains empty. Industry remains in the suburbs where housing is less expensive. Expect more keys to be returned to lenders with office space converted to housing, with more apartments for subsidized lower income households. Downtown will be more of a place for living and entertainment than working.
Alan Gin, University of San Diego
YES: Downtown San Diego experienced a renaissance after the opening of Petco Park, but that was mostly in residential housing and nightlife. Office employment has been moving to suburban locations for decades. The ability to work remotely has also reduced the demand for office space. Workers continue to seek that option, despite efforts by employers to get them to return to the office. That trend will likely continue in the future, which will jeopardize more downtown office buildings.
James Hamilton, UC San Diego
YES: A number of factors are coming together to put a lot of pressure on the bank loans that finance commercial office space. The post-COVID move to remote- and hybrid-work arrangements has proven to be an important long-term trend. Interest rates moved up higher and will stay high for longer than many people anticipated. And too much wishful thinking went into the construction of what was supposed to be a new life sciences hub for downtown San Diego.
Norm Miller, University of San Diego
YES: In markets like L.A. we might see 20 to 30 percent default before we hit the bottom in the office market. Loan modifications will also occur for those with significant equity after realistic write downs. Some office property will be converted to residential, but only at distressed prices. Note that these dire statistics only apply to the office market, with industrial and retail holding up well, and multifamily doing fine, if not over leveraged with variable rate debt.
Ray Major, SANDAG
YES: There are three factors affecting the San Diego commercial real estate market that will potentially lead to additional defaults: oversupply of more desirable new class A office space entering the downtown market, demand for office space in downtown has decreased due to changes in work/remote schedules, and growth of additional office jobs in the region has slowed. With vacancy rates exceeding 30 percent in the foreseeable future, older buildings like 600 B St will face a difficult time paying their financial obligations.
Kelly Cunningham, San Diego Institute for Economic Research
YES: The pandemic lockdown was not the sole reason for oversupply of office space, but significantly hastened trends of working from home with little to no need for gathering in offices. Such trends continue unless compelling reasons exist for office workers to gather in person. Office buildings may be repurposed into residential and retail uses or combinations for financial viability, otherwise many more buildings will default into bankruptcy as seen like other downtowns across the nation.
Executives
Bob Rauch, R.A. Rauch & Associates
YES: The B Street corridor will have a long way to go before returning to low vacancy numbers. The new normal of the hybrid work era has shifted the numbers dramatically, and these older buildings will be the last to recover. The wild card that could jump-start some of these buildings is artificial intelligence — it is growing at rates far beyond those of other technologies and already stimulating office demand in tech hub markets.
Austin Neudecker, Weave Growth
YES: The foreclosure rate of commercial office buildings across the country increased over the past four years. While San Diego residential buildings are in high demand, downtown offices have not fully recovered from the pandemic transition to work-at-home. For older buildings struggling to maintain occupancy, impending debt payments could make owners insolvent. Thus, I expect a turnover in ownership unless existing landlords can drive up occupancy quickly.
Chris Van Gorder, Scripps Health
YES: I think it’s certainly possible that more downtown office buildings will go into default. Remote and hybrid work is here to stay despite what some employers would prefer, so all that leasable space will not be needed. And downtown buildings will suffer the most given their size and location and all the issues that come with that location for their tenants and potential tenants — including traffic congestion, homelessness, a lack of convenient parking and more.
Jamie Moraga, Franklin Revere
YES: Post pandemic, there hasn’t been an influx of employees returning to office buildings, especially downtown. The area continues to face higher office vacancies than the rest of the region, and with more supply expected to become available this year it will contribute to the likelihood of more defaults. That said, there could be opportunity for some of the vacant office spaces to be converted or repurposed as demand for downtown residential, retail and mixed-use continues to remain positive.
Haney Hong, San Diego County Taxpayers Association
YES: Our region’s center of gravity for economic activity is near and around UC San Diego — just think about traffic patterns. It’s in La Jolla and Del Mar where new medicines and other technologies are envisioned, and it’s there you have the co-location of intellectual firepower, venture capital money, and the networks that mix together to create the innovation we get excited about. Downtown doesn’t have that magic potion unfortunately, so unless offices become housing, defaults may become more prevalent.
Phil Blair, Manpower
YES: The trend is not good. While a major number of downtown office buildings are owned by one company, Irvine, it is reassuring that the firm has very deep pockets. They should be able to ride out even a multiyear slump in office leasing. Many other building owners do not. Unfortunately, conversions of office space to badly needed residential has been a nonstarter.
Gary London, London Moeder Advisors
YES: The downtown office market is experiencing historically high vacancy rates, now exasperated by the completion of new office space elsewhere downtown. Tenants are also downsizing, and there will be a flight to quality. The older buildings are on B Street, while the quality buildings are to the west and south. Many of these assets are saddled with nonrecourse, variable rate loans in a high-interest rate market. This is a perfect recipe for failure.
Not participating this week:
David Ely, San Diego State University
Caroline Freund, UC San Diego School of Global Policy and Strategy
Have an idea for an Econometer question? Email me at phillip.molnar@sduniontribune.com. Follow me on Threads: @phillip020
By Dave Rice
Is Measure A going to affect a significant number of properties? Is it going to affect affordable housing in any meaningful way? Come now, let’s not be dense – this hits a handful of rich people who can absolutely afford to drop $10K in the city coffers if they’re leaving a vacation home vacant on purpose – let’s say that’s their civic contribution that would be realized in other ways if they actually lived, worked, and shopped here full-time.
Or it hits STVR hosts, who can either factor the cost into their business model or give it up if margins are really that thin (maybe not everyone needs to fancy themselves an amateur hotelier). But let’s not kid ourselves and believe the kind of housing this will free up will be plentiful or affordable.
In the exceedingly rare instances where someone might be eligible for an exemption, will it be too hard to apply for? That’s something we can argue and refine but that’s the bathwater, or just the little bit of it that splashes out of the tub, not the baby. An argument that the whole proposal is DOA because military members are too stupid to file for an exemption is either dismissive of or telling tales out of school about what we really think of military intelligence.
Poor, poor grandma who needs a home near her doctor? If she’s really poor why does she have multiple houses, and if she’s not does this really affect her? I live in a neighborhood where “aren’t you afraid you’re going to get shot?” is the first thing outsiders ask me about where I’m from, and if Grandma has owned her mostly-unoccupied vacation house for any significant time I probably pay a lot more property tax than she does. You couldn’t trip over the limbo bar to gain my sympathy, it’s buried a few feet deep.
This is a tiny nod toward taxing the rich, but that’s all. It’s not significant or meaningful, it won’t do a lot, most of the housing stock in question even if returned to actual residents won’t make a dent in the astronomical cost of living in or anywhere near this city. But it’s a tiny step in the right direction – and watching how hysterical the moneyed class is about the rest of us asking for even the tiniest drop in the goddamned bucket we’re trying to fill without their help is telling.
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This is the first installment in a series of stories on the history of dining out in La Jolla, how it’s changed and how it continues to evolve.
It’s hard to imagine La Jolla without its restaurants, from the lines stretching down the block at The Taco Stand to the iconic views at George’s at the Cove.
But the way La Jollans eat and where has changed dramatically since the area’s founding in the 1800s.
In this first part of the new month-long series “Dining Out,” the La Jolla Light looks at local restaurants from the 1880s (when La Jolla was first developed and settled) to the early 1920s.
“La Jolla had very few people at that time,” according to local historian Carol Olten. “There weren’t a lot of restaurants, as far as we know.”
Olten said she gets information about La Jolla’s earliest days from the diaries of local pioneer Anson Mills.
“He kept track of where he went and what he did … but he did a lot of home cooking,” she said. “So when they went to a restaurant for dinner, it was a big occasion. It was something people mainly did on holidays or … a social occasion.”
One restaurant Mills would go to — believed to be one of the first in La Jolla — was Montezuma Cottage. Olten said it is believed to have opened in 1895 near the intersection of Prospect and Jenner streets.
Mills described the restaurant as a popular eating and gathering spot for locals and tourists, Olten said. He wrote an entry about a Thanksgiving dinner there with about 60 people.
Montezuma Cottage later became known as the Seaside Inn and Ocean View restaurant. It was torn down in 1931.
Culturally, eating at a restaurant was a more formal occasion at the time, Olten said.
“You didn’t go to a restaurant just to hang out with friends like you would today. It was purposeful then,” she said.
Around 1900, a restaurant known as the White Rabbit opened near the corner of Girard Avenue and Prospect Street. In addition to a rooftop garden, it featured a tea room, joining a national trend.
“Tea rooms went with the suffragette movement because in those days, [women] didn’t have a place to gather without an escort, so tea rooms started opening in hotels and women could go there and sit down and have a social tea or lunch,” Olten said. “La Jolla got in on the tail end of that thanks to [Green Dragon Colony founder] Anna Held and [La Jolla philanthropist] Ellen Browning Scripps.”
One of them, called The Cricket, opened in the early 1900s with white tablecloths. Olten said it was near what it is now Eddie V’s restaurant.
“It was originally part of the Green Dragon Colony … and was sold to a British woman named Daisy Mitchell,” she said. “It stayed a tea room for many years, and she kept a guest book that was decorated with reds and greens and had a medieval theme. So it was very British.”
Joining a trend toward more upscale dining, one of La Jolla’s “most well-established and well-known restaurants” opened in 1912 at 1227 Prospect St. The Brown Bear had “stylish, fashionable service and a menu to please the gods,” Olten said.
A house specialty was Welsh rabbit served in a silver chafing dish. The restaurant was in operation until 1941.
Several restaurants opened around 1915, about the same time as the Panama-California Exposition, a world’s fair-type event held in 1915-16 that brought 3.7 million people to San Diego.
One of La Jolla’s new restaurants, the Spindrift Inn, opened in 1916 and was considered a “last stop” out of town.
“Most restaurants at that time were located in the immediate Village area,” Olten said. “The one that was astray would have been the Spindrift Inn [in La Jolla Shores]. This was in the very early days of automobiles, so not very many people had cars, but those that did would … drive their cars and the last stop before you got out of town was Spindrift Inn.”
The Spindrift Inn later became The Marine Room, which still stands.
Olten said the restaurant was operated by the Hannay family for about 20 years. Their “rambunctious” fox terrier, Jiggs, would roam the dining room.
Another Expo-era restaurant was the Dining Car, which operated in an old trolley car parked near Goldfish Point. Dinner was $2 per person. It burned down on Halloween night in 1923.
Next installment: With new hotels being built in La Jolla in the 1920s came new hotel restaurants. But later, World War II would have an impact on La Jollans and San Diegans in general and on where and how they ate. ♦
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