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