Costs, Resistance to Denser Development Holding Markets Like San Diego Back

In many ways, San Diego illustrates the challenges facing many attractive U.S. cities, including the demand for affordable housing, struggling retail, and the need for more senior housing.

At the top of the list is a strong community wariness of any new development, which has made it difficult to build meaningful mixed-use projects, said speakers during a January panel discussion organized by ULI San Diego–Tijuana.

“Density” is still a landmine for local politicians, said Gary London, partner of London Moeder Advisors. “It’s not that developers are overlooking [mixed use], it’s that policies haven’t caught up to the needs of the market,” he said. “We’ve put so much power in the hands of local communities [that] our elected policy makers are afraid to make a move in the right direction.”

San Diego ranked 24th on the Emerging Trends list of markets to watch, but it was only 10 percent out of the top ten, said Anita Kramer, senior vice president of the ULI Center for Capital Markets and Real Estate, who presented the Emerging Trends findings to the San Diego audience. San Diego scored strong in several areas, including ranking in the top five of favored destinations for migration from primary markets, she said.

But one of the key issues facing San Diego is the price of housing, which has risen 128 percent since 2000, while the supply has increased by only 17 percent, Kramer said.

After many slow years, the pace of new home sales is picking up, said Peter Dennehy, senior vice president of Advisory for Meyers Research, during the panel discussion, which was moderated by Lynn LaChapelle, managing director for JLL in San Diego.

“I think we’ll see the highest new home sales this year than we’ve seen probably in a decade,” Dennehy said. The numbers will likely remain small—somewhere between 3,500 and 4,000 homes—but that’s still almost double the annual sales of recent years, when there was little new construction, he said.

After years of focusing on high-end product, San Diego is starting to see “growing diversity in housing,” with smaller homes and lower price points, Dennehy said. “Like it or not,” he said, under $700,000 is seen as an affordable level in San Diego, where the average price in many communities is closer to $900,000.

But San Diego will need 17,000 new housing units a year for ten years to meet demand, a scenario that is unlikely, London said. Until that happens, San Diego housing will be in “perpetual crisis,” he said.

Multifamily specialist Fairfield Residential is focusing on “suburban urban” projects in the communities that surround the city of San Diego, said Michelle Lord, senior vice president of capital markets. “Pent-up demand in suburban areas is very significant,” she said. “If you’re able to do it, there is plenty of demand.”

But building projects in San Diego is still a challenge, Lord said. “San Diego is traditionally extremely difficult for entitlements,” she said.

Outside of housing, the office market is ready to rebound after absorbing the supply created by the last building spurt a decade ago. “We’re heading for a renaissance [in office] because we have been undersupplied for a long time,” London said.

But San Diego is feeling the effects of the turmoil in retail. The historic Jon Jerde–designed, five-story Horton Plaza—an icon of downtown shopping malls when it opened in 1985—is struggling to keep retailers. Meanwhile, one of the city’s landmark suburban malls, University Town Center, is going through a transformation, adding smaller retailers, a 23-story apartment building on site, and a San Diego trolley station. (Both are owned by Westfield, which was recently sold to French property investor Unibail-Rodamco for $15.7 billion.)

“It’s all about mixed use,” London said. “That’s where the action is going to be.”

But creating projects that change the dynamics of the city will be difficult, panelists said. San Diego suffers from a historic disconnect between the location of housing and jobs, they said. Much of the job growth has been in the northern part of the county, while most of the homes have been built in the south, creating daily traffic jams on freeways.

“We need to create better linkage” between housing and jobs, London said. “Otherwise, there is going to be an economic bill to pay in this region.”

In general, high-density, mixed-use projects still face resistance from the communities, where residents are wary of any projects that might increase traffic and congestion. One Paseo, a mixed-use project in north San Diego that was criticized by local community groups, took seven years before it was approved last year, LaChapelle noted.

Local government requirements make it impossible to make the numbers work on most projects, Lord said. “When I talk to investors, [San Diego] is always on the list of where they want to invest,” she said. However, “creating investment opportunities is so difficult, there aren’t as many transactions.”

San Diego communities need to be educated on the benefits of density and that “densification and mixed use in suburbs doesn’t necessarily mean the character of their neighborhood is going to change,” London said.

At the same time, developers need to adjust their definition of density to accommodate local expectations, London said. That means rowhouses and townhouses, not skyscrapers or blocks of six-story condominiums, he says.

“They [developers] need to deliver density and they need to deliver density that the community will support,” London said.

Faced with the issues, “the number-one opportunity is infill,” Dennehy said. “Los Angeles and Orange County are way ahead of us in terms of developing their communities.”

The focus in the next few years will be in the suburbs, panelists said. “A lot of suburban areas have retail that is very tired and needs reuse,” Lord said. But with so many obstacles to building modern developments, “outside of the core area we are seeing project design that is very traditional,” Lord said.

On at least one issue, the discussion demonstrated the type of divisions that exist within the regional planning community. Los Angeles has been successful developing projects along new metro routes, something San Diego “should be trying to emulate,” Lord said.

But London countered that San Diego’s light rail is not achieving the same type of benefits. The trolley, which is expanding to the northern part of the city, is an “incredibly civic waste of money,” he argued. “We’re really going in wrong direction.”

A member of the audience asked about the future of infrastructure, including badly needed road and transportation projects. But future projects are in doubt, with budgets strapped around the state, London said. “With the new tax bill, all bets are off,” he said. “Basically, the state is looking at a shortfall.”