written by
Kyle Clark

Some refer it to the Midway District. Others say Sports Arena. Regardless of the name, this area is set for a transformation unlike any other submarket of San Diego County.

The district has developed over the past few decades as a hodgepodge of older industrial warehouses, strip malls, small office buildings, big box retailers, independent and chain restaurants, multi-family housing, strip clubs and adult bookstores. There is something for just about everyone here yet not a lot of character and it’s not a place for families to hang out after dark. The major draw is our aging Sports Arena, yet except for hitting the Red Lobster or Chili’s before a show, you are best to go straight home afterwards. With the newly approved Midway-Pacific Highway Community Plan, the current redevelopment of the former post office and the proposed redevelopment of the SPAWAR facility, there is tremendous potential for this somewhat blighted submarket to blossom over the next 10-15 years.  Let’s look at each of these three components.

Midway-Pacific Highway Community Plan. Last September, the City Council unanimously approved this document, which looks to upgrade the area of approximately 800 acres between the San Diego River, I-5, Liberty Station and the Airport.  The plan aims to increase housing capacity in the area from 5,040 to at least 11,585 units, and plans include a multi-use path from Mission Bay to San Diego Bay, 30 acres of new parks and improvements to the area surrounding the Sports Arena.

Infrastructure improvements associated with this plan include new streets bisecting the Sports Arena site linking Kurtz Street to Sports Arena Blvd. and Midway Dr. plus millions of dollars dedicated to traffic improvements at 20 intersections and 17 road segments.  Linear parks with walkways and bike paths are envisioned adjacent to Pacific Highway and Sports Arena Blvd. stretching from the MCRD/Airport to the San Diego River.

The goal is that with the investments in the plan by the City, private development will follow to provide upgraded retail, office and multi-family residential over the coming years. One key component of this new investment will be the eventual redevelopment of the existing Sports Arena into a mixed-use residential, commercial and entertainment-oriented community village.

Details of the plan can be found at https://www.sandiego.gov/planning/community/profiles/midwaypacifichwy/plan

This is not the first time ambitious ideas have been floated by City officials for this area.  When Byron Wear was councilman for District 2, he was proposing an improvement vision that encouraged more circulation and a link from San Diego Bay to Mission Bay by way of a canal for small boats.   Things take time and he termed out of office. His replacement, Michael Zucchet scrapped those ideas to develop his own plan.  His term was cut short and nothing has transpired since then…. until this newly-adopted plan.

One thing the City HAS done is to keep all leases on the Sports Arena site and other City-owned properties that surround the arena either on a very short-term or month-to-month or, if longer, inserting clauses to terminate for redevelopment. This will ensure that when something does materialize, the City can deliver the real estate. This tactic does have a downside, as without longer lease terms, owners and businesses are reluctant to invest in the properties.   We have seen this with the deterioration and subsequent demolition of the Black Angus restaurant and the languishing strip retail center behind it, the closure of Pier 1 and the continued use of the property next to Pier 1 as a Salvation Army thrift shop.

This will take a lot of effort from the City Council to see it through and Lord knows how much time this will take.   Past efforts have been less than productive, however there does seem to be some momentum with the newly adopted plan and hopefully the citizens won’t stand for letting the City’s properties languish further than they already have. I am optimistic that something will eventually occur here, and we will see some major improvements in the next 10 years.

The Post. Hammer Development is proceeding with their redevelopment of the former post office on Midway Dr. Current plans for this state-of-the-art campus consist of 230,000 square feet of office and restaurant space within the existing 2-story building, featuring a sky-atrium in the center of the structure.

Unlike the City’s plans above, this project is set to get underway very soon. Construction is set to begin this summer with completion expected in late 2020.  No tenant has been signed yet.

More information on The Post can be found at http://www.postcoastal.com/

SPAWAR. Last September, the US Navy hosted an informational meeting regarding their desire to solicit proposals for the redevelopment of the existing SPAWAR facilities between I-5 and Midway Drive. This site consists of approximately 70.5 acres.  The Navy’s desire is to enter an agreement with a developer to either incorporate the SPAWAR facilities into a new, more efficient development or trade the land for another acceptable site and facility for SPAWAR in a different location.  Due to the relative lack of available land in the Navy’s target areas, my expectation is that any new development will incorporate a more efficient SPAWAR facility in a portion of a new, multi-use development of the land.

A shining example of this approach is the Pacific Gateway project currently under construction Downtown by Doug Manchester and Perry Dealy.  At Pacific Gateway, the developers swapped the land for a new 17-Story, 372,000 square foot office building to house the Navy’s 7th Fleet headquarters.   In addition to that structure, the 12-acre site will be improved with just over 2.5 million square feet of hotel, office and retail space.  This is a win-win-win for the navy, the developers and the community as this development will replace a blighted waterfront landscape and transform our skyline south of Broadway.

Since the SPAWAR land is federally-owned, there may be no restrictions as to the zoning or height of the proposed buildings, so really, the sky’s the limit on what can be constructed.

One additional component to this proposed development is the City’s vision for a Grand Central Station within the project to link the Midway/Sports Arena area with train, trolley, and bus access to the Airport and all other areas of San Diego.

The due date for proposals has yet to be set. Currently, the Navy is soliciting questions from interested parties and posting their responses at https://www.neco.navy.mil/upload/N62473/N6247318RP2110001NBPL_OTC_RFI_QA_20182112_FBO_NECO.pdf

Lawsuits and delays pushed back the Pacific Gateway ten years before they could break ground on construction. I would expect that the SPAWAR project will take at least that long, given the various agencies involved plus the sheer scope of the project. Add a few years to choose a development partner, design the proposed project and then add another couple of years for construction and this is a project that is 15+ years away. Hopefully by then, the City will have the Sports Arena sorted out, the Post will have been operating for over a decade and other infill development between all three components will have occurred. Come 2035, The Midway District (or whatever it is called then) could be a new, thriving attraction within the San Diego market as opposed to what we see there today.

written by
Dan McCarthy

President John Adams famously said, “Facts are a stubborn thing”.  Likewise, the facts of changing demographics are stubborn and compelling; with significant impacts on real estate.  The aging baby boomer generation is a prime example and is having a notable effect on medical delivery and facilities across the country.  With over 9 million Americans crossing the 65-year age threshold over the next 5 years, demand for medical care will increase across the spectrum of healthcare disciplines.  To meet this demand, 150,000 additional healthcare practitioners are expected to enter the national economy over the next 2 years alone and they’ll need a place to hang their stethoscopes.

Large healthcare organizations and institutional medical office investors have been acutely aware of these facts and invested heavily in medical office buildings (MOBs) over the past 8 years, in the wake of the Affordable Care Act.  After declines in 2010-2012, absorption of medical office space has exceeded new supply every year since, resulting in an overall vacancy drop to 7.6% nationwide.  Recent increases in cost of capital have slowed the pace of traditional medical REIT acquisitions and has created opportunity for other investors.  No longer regarded as a niche investor market, medical office has gained favor approaching core asset class.

Medical demands have generated extraordinary innovation from healthcare providers in recent history.  Breakthroughs in medical research and technology have expanded the range of healthcare procedures available and the facilities they occupy.  Private surgery centers, specialty practices, and large physician groups are moving away from expensive hospital sites to off-campus alternatives and suburban MOB’s.  This is changing the real estate landscape for medical office, including the trend of “retailization”, utilizing retail and commercial locations more inexpensively and closer to their patient base.  Urgent care, dialysis centers and primary care clinics have become commonplace in retail centers and MOB’s.  Based on these new user dynamics, we expect continued, gradual reduction in MOB vacancy with upward pressure on lease rates.  Barriers to entry for new MOB development remain high and supply will likely trail overall demand.

This is a healthy trend for MOB owners across the nation, but how is this affecting medical office locally?  San Diego is a vibrant reflection of these national trends.  Our innovation economy is at the forefront of significant advances in genetics, biotechnology and medical device technology.  Importantly, the ongoing collaboration with 5 regionally based and nationally acclaimed healthcare organizations has raised the level of care in our region and fueled demand for clinical medical office space in all submarkets.  Solid net absorption of well over 100,000 SF in 2017 & 2018 has lowered the MOB vacancy factor to 6.1%.  Our region has over 12 million SF of existing medical office but will require far more to keep up with a population base of 3.3 million and expected to grow to 4 million in the next 30 years.  500,000 people are 65 years or more, increasing by 18,000 per year over the next 5 years, mirroring the national trend.  Planned multi-tenant MOB development over the next five years, however, is a fraction of the projected 100,000+ SF annual absorption.

Cap rates for MOB investments remain in the low 6% range, reflecting the safety, stability and long-term desirability of this asset class.  We believe that the underlying medical office leases in a medical asset provide long term value with rising demand and rising lease rates.  Despite changes in healthcare delivery and public policy, medical real estate in San Diego represents a sound investment opportunity for the long haul.

This is a healthy fact…for the region and for the asset class. At Intersection, we are focused on trends that impact our investors and owners. As available land for development is scarce and medical office vacancies decrease, we have looked for assets that can support medical use where historically those uses would not have been considered. This is not an easy proposition, but one which we are diagnosing wherever possible!

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