Investors Sense Payoff in Downtown Gamble
A year ago, Mike Ribant, a 27-year-old Detroit native, was living and working in the San Diego area as a securities broker and a restaurateur. Then the fever hit him.
He closed down his restaurant, cut his securities business back, and in June walked into the Center City Development Corp. (CCDC) offices with a proposal for apartments downtown.
“I can’t remember or recall how it happened,” Ribant said about his transformation into a downtown developer.
“I always loved downtowns, and growing up in Detroit, I had been deprived of a great one,” he said. “There’s nothing happening in downtown Detroit . . . but in San Diego, it not only will happen, it is happening.”
So fell another victim to the Downtown Grippe.
Ribant has driven his grubstake deep into the inner-city soil and--with the blessing of CCDC, which is the city’s muscle for downtown development--is preparing to build 24 apartment units above 8,000 square feet of shops and stores at 3rd Avenue and Market Street.
Stories like Ribant’s are being played out throughout the city, with a new wave of hopefuls laying claim to San Diego’s downtown. They come from Detroit and Ireland and Austria, are hometown boys with Japanese partners, and include powerful out-of-town development companies. They are members of old-line San Diego families who have used their inner-city businesses as springboards for the quiet acquisition of nearby land. They are huge investment firms based in Dallas and Newport Beach.
The new downtown land barons say they are seizing an opportunity made possible because, for years, local banks and established developers have been looking down their noses at the inner city, while casting their eyes northward to Mission and Sorrento valleys.
“I’m not saying that the people in San Diego are duds, but you name me one San Diego-born developer who has the financing who is doing gutsy developing,” said Ernest Hahn, developer of Horton Plaza.
Dan Pearson, who is restoring the Victorian-era Horton Grand and Keha Saddlery hotels at 311 Island Ave., said:
“I don’t mean this as a religious reference, but Jesus of Nazareth was not a very big hit in his hometown, either. . . . I’ve had numerous conversations with what I’ve called ‘Old Money’ in San Diego, and they were too close to it, they didn’t think it would work.”
Almost like Monopoly players, the new believers in downtown are snapping up lots from the conservative bank trusts, absentee landlords, small shop owners and elderly investors who owned the decaying urban core 20 years ago.
The big lure, real estate brokers and investors say, is that dirt in downtown San Diego is still cheap. While prices for prime downtown land range from $250 to $500 a square foot in Los Angeles and $1,000 to $1,200 a square foot in San Francisco, they are only $70 to $100 in San Diego, according to Home Federal Savings and Loan appraisers.
As a result, said Brian Walsh, a downtown real estate broker who faithfully charts downtown property sales on a large street map, “we’re working on more sales now than we ever have.”
Walsh said his firm, Walsh & Chacon, is scouting property in the Gaslamp Quarter historic district for 25 buyers, five times the number he normally handles for the area.
“Downtown has all the sparks it needs,” he said. “There is a fire going. . . . Right now, things are hot and are going well.”
The key to the newest wave of interest in buying downtown was the opening of Horton Plaza on Aug. 8, Pearson said.
“It was like a spaceship landed,” he said. “The day before, there was no one on the streets.
“The next day, there are thousands of people on the streets. Mothers pushing baby carriages. Little old ladies in fancy designer clothes. Many of the restaurants in the Gaslamp Quarter were doubling their business. It happened overnight.”
Of course, it is too early to tell exactly what this means in terms of who is buying and selling downtown, but Walsh said there are some strong indications that the asking price will be considerably higher now. Some examples:
- A building on a small 4,000-square-foot lot on 5th Avenue, between J and K streets, sold for $240,000 in March, five months before Horton opened. Now, it is back on the market for $300,000--25% more.
- The northeast corner of 5th Avenue and Beech Street was purchased in March, 1984, for $525,000. The current asking price is $937,000.
- An 1888 historic building at 835 5th Ave., which sold for $1.5 million in 1982, is up for sale. The asking price: $2.4 million, Walsh said.
Other real estate experts remain less convinced about the impact of Horton, saying that torrid speculation drove up downtown property values several years ago, especially in the 16-block Gaslamp area, where several eager businessmen lost their investments when Horton did not open in 1982 as anticipated. They say the race downtown will be not only to the swift, but also to those developers with enough financial staying power to renovate buildings or accept relatively low rents until the current office space glut is over.
Despite that, Pearson said interest in buying downtown is becoming contagious.
“My phone rings off the hook,” he said. “What should they buy? Where should they buy?”
Local developers say that 25 years ago the question was: Who would be stupid enough to buy?
South of Broadway, small businesses and warehouses showed the signs of deterioration; downtown department stores and businesses eventually vacated the city’s core for nicer digs in Mission Valley and other suburban spots.
Reversing that trend meant changing two basic characteristics of downtown--how it was parceled out and who owned it.
Roy Potter, executive vice president for San Diegans Inc., said the owners of the old downtown were bank trusts, absentee landlords and elderly investors--the kind of owners primarily interested in collecting rents, not investing in and refurbishing their properties.
Potter said many of the absentee owners lived in Europe, making voluntary rehabilitation extremely difficult. And as for the elderly investors, “There was little incentive for someone at the end of their life span to take the risks of someone who is a younger entrepreneur,” he said.
“It was very difficult for people to see the light at the end of the tunnel,” Potter said. “They saw (that) if they dumped money into the property and the neighbors weren’t doing anything, it might be money spent unwisely. In fact, it might increase their taxes.”
That reluctance was compounded by the way downtown was carved up, Potter said. Each block, covering about 60,000 square feet, was divided into 12 lots of 5,000 square feet each. The multiple number of owners on each block made it difficult to coordinate rehabilitation efforts, or to build more than one- or two-story buildings.
When the city declared much of the land south of Broadway a redevelopment area in the late 1970s, however, both of those obstacles were overcome. Through the CCDC, which serves as the city’s redevelopment arm, the government could assume ownership through condemnation and amass land suitable for the kind of impressive developments that would become catalysts for downtown renewal. For instance, CCDC used its powers to combine 33 private ownerships over a five-block area to make Horton Plaza possible.
Yet the significance of the changes was lost on the major San Diego banks and local developers, who continued to think of their downtown with distaste, say redevelopment proponents.
“They get used to going by the same buildings in the same corners in the downtown area,” said Hahn, who was one of the first to realize downtown’s potential when he submitted a bid in the 1970s to build Horton Plaza.
“Here’s a flat or a duplex sitting there five blocks from the First Interstate (Bank) building, and somehow they don’t get the concept that this isn’t the right use,” he said.
Those who did see the opportunities, and who seized them early--outsiders and smaller developers--became the new owners of San Diego’s downtown.
Hahn, whose Los Angeles-based shopping center company paid about $7 a square foot for land purchased through CCDC, submitted his bid for Horton Plaza in the 1970s.
The Koll Co., with headquarters in Newport Beach, first bought the Central Savings Tower at 225 Broadway in 1978, built the $68-million Wells Fargo Bank office tower two blocks to the west in 1982, and is now negotiating with the CCDC for a development near the county courthouse farther west on Broadway.
The Trammel Crow Companies, with headquarters in Dallas, opened a local office in 1979 and began building its Imperial Bank Building at 701 B St., in San Diego’s financial district, in 1979. The company owns the city block immediately to the east of the Imperial Bank Building and is contemplating another development there, said Steve Williams, partner in charge of Crow’s San Diego office.
In addition, the Santa Fe Land Improvement Co. is planning to build at least $1 billion worth of office, commercial and hotel space by the year 2008 in the 6 1/2 blocks it owns around its refurbished Santa Fe Depot. The firm is also planning to develop four blocks at the foot of Market Street, near Seaport Village.
Meanwhile, smaller developers and local investors are staking their claims in the shadow of the larger companies and government action. As the new wave sweeping out the trusts, absentee landlords and elderly investors, the new owners of downtown are brash. As downtown emerges from the squalor, four words are quickly becoming an important part their vocabularies: “I told you so.”
“I think they are a breed that is innovative, with some degree of imagination,” said Tom Hom, a longtime San Diegan whose family has quietly accumulated blocks of downtown over the years. “They are taking higher risks (by buying downtown) than some of the blue-chip stuff you would buy in La Jolla.”
That influx includes men like Richard Watson, who arrived in San Diego seven years ago from Ireland and began dabbling in real estate. His recent acquisition of the office building at 4th Avenue and E Street is considered a coup, since it sits directly across from Horton Plaza and the proposed downtown arts center.
Just how Watson and his partner came to buy the property serves as a primer of the kind of forces coming together in the changing downtown.
The building was purchased for about $115,000 in 1920 by two families, with a third buying into the property in 1937, said Blair Leslie, president of Fintzelberg & Steinmetz, a real estate and insurance firm. Through inheritance and family growth, the number of owners eventually grew to 18, said Leslie, who became a partner in the property through marriage.
Because there were so many owners, it was almost impossible to decide what to do with the property once property values began rising and construction on Horton Plaza began across the street. Leslie said the younger owners were pushing to spend about $2 million to rehabilitate the building, but the older ones balked, content to keep collecting the $5,000-a-month rent.
Along came CCDC, which gave the owners an ultimatum--either refurbish the building, sell it or be taken over by government condemnation. That opened the door for Watson, who with partners bought the building for $2.8 million scarcely a month before Horton Plaza opened. The price came to $186 a square foot.
The person who seems to be most active in buying downtown, however, is Bud Fischer, president of Fischer Auctions. The 53-year-old businessman-developer first jumped into the buying fray in 1980 by--ironically--selling off some property he had in Mission Valley to invest in the yet-to-be-revived inner city.
“When I came downtown, it was like being reborn. You could get out and walk,” he said. “When you’re in Mission Valley in an office building, you have to get in your car, fight the traffic and get around. When you’re downtown, I get out of my office two to three times a day. There are people I know on the streets. It’s a much more social atmosphere.”
Fischer’s first purchase was the $650,000 acquisition in 1977 of the Backesto Building at 5th Avenue and Market Street. Shortly afterward, he bought for $800,000 the three-quarters of a city block immediately to the east of the downtown central library, which is at 820 E St.
As the opening of Horton Plaza neared, Fischer and his partners went on a tear:
- In 1984, he bought the Samuel Fox Building at 6th Avenue and Broadway for $2.75 million, or $275 a square foot.
- In March of this year, he bought a building at 8th Avenue and J for $550,000, about $33 a square foot.
- Also in March, he bought the Granger Building at the prime corner of 5th Avenue and Broadway for $2.3 million, about $184 a square foot.
- In June, he bought the Star Hotel at 7th and Island avenues for $370,000, or $37 a square foot.
Fischer bought at least three of his properties from the Trust Services of America Inc., which has sold off at least 10 of its holdings in downtown in recent years, said Robert Hendrickson, a trust officer. Trust properties usually have to be sold because of tax reasons after one of the owners dies, he said.
Buying sprees by Fischer and others obviously make some people happy, and Morrie Slayen is one of them.
Slayen now finds himself holding key spots on the downtown Monopoly board. For years, he and others like the Hom family have been quietly acquiring inner-city property as a natural extension of their families’ downtown businesses, not because of the thundering hoofbeats of redevelopment.
Slayen said he began buying up the parcels around his father’s old upholstery shop 20 years ago, and now he owns the entire block between 7th and 8th avenues, and F and G streets. He bought a parking lot nearby, and also owns the Carriage Building at 4th Avenue and G Street.
Probably his most important holding, however, is the Southern Hotel at 6th Avenue and B Street, a four-story building positioned in the shadow of glass towers along San Diego’s financial row.
Slayen said he bought much of the land for $5 a square foot, and now he estimates its value at $100 a square foot. Although he vows not to sell his land, he admits he’s had some tempting offers for a gold mine he says he acquired by accident.
“My dad had a little piece (of land), and from that we built it up,” said Slayen. “To be honest, it’s just dumb luck.”
For others, it was something more than luck. Developer Chris Mortenson, who owns the Golden Lion restaurant and is creating an arts center adjacent to Horton Plaza, turned a tidy little profit when he sold an office building at 620 C Street to Los Angeles investors for $4.5 million. He bought the building for $2.1 million after believing in then-Mayor Pete Wilson’s pitch for downtown redevelopment.
With those kind of sales and possibilities, the downtown land bug spread fast. Walter Smyk, with the backing of Japanese partners, has erected the posh 27-story, 172-unit Meridian Condominiums. A Canadian built the First Interstate Bank building on 401 B Street. The Vienna-based firm Southwest Estate Group Inc. bought one-quarter of a city block near the Meridian for $800,000 recently for a proposed development.
“As soon as Horton Plaza was under construction, we knew this major attraction was created to move people into downtown,” said San Diego resident Reinhold Wessely, Southwest Estate Group president and chief executive officer.
Now, San Diego’s big-time banks and developers are contracting downtown fever. Local banks who were more eager to back projects in the San Francisco Bay area, Los Angeles or Orange County are now taking note of the development money being pumped into property within walking distance of their main offices, said John McKnight, senior vice president of major loans at Home Federal.
McKnight said Home Federal has loaned local developer Kit Sickels $32 million for the renovation of the U.S. Grant Hotel, which is across Broadway from Horton Plaza. The institution also has “a dozen” loans for properties throughout downtown, and has made commitments for three or four more. But even the loan for the U.S. Grant shows how the major financial institutions were late to the downtown development game. Home Federal loaned Sickels his $32 million in 1983 only after financing was arranged for Horton Plaza.
“I’ve had numerous conversations with what I’ve called old money in San Diego, and they were too close to it. They didn’t think it would work,” hotel restorer Pearson said about the big banks and developers.
“It was kind of interesting. In the last 90 days before Horton Plaza opened, I had a chance to talk to San Diego’s old line Establishment, and they were genuinely worried they made a mistake, although they were convinced Horton Plaza was not going to work,” Pearson said. “The worried looks I saw was that they may have missed the boat in their own backyard.
“I should say, without exception, that they are all now scrambling like the devil to find a position.”
And if they’re successful, they will be shoulder to shoulder with people like Ribant from Detroit, who is hoping to stake a claim with a small 24-unit apartment complex. Although he is a small developer, his case of Downtown Grippe is a serious one.
“If this all goes well, believe me, I’ll be at CCDC’s door again, trying to do something else downtown,” he vowed.