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THE PRICE OF DOING BUSINESS

When it comes to renting commerical space in the Village, property owners have the upper hand. It’s a situation not likely to change, according to commercial real estate brokers in town.

The commercial sector consists of a number of subcategories including retail, office, industrial and research and development. The Jewel’s office market is limited and in high demand.

“You can’t build more than 5,000 square feet of new office space,” said real estate agent Mike Slattery of Grubb & Ellis. “What that’s done to the growth potential in La Jolla is there have not been any large buildings built since the late ‘80s.”

Slattery, who’s handled scores of commercial real estate transactions during 26 years of business here, said the rules of the game were changed dramatically in the mid-1980s when La Jolla’s planned district ordinance governing commercial development was passed. That ordinance, he said, prescribed stringent standards that discouraged commercial growth.

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“The number of hotel rooms was capped by the planned district ordinance,” said Slattery. “The ordinance even restricted what type of tenant, how much retail vs. office you could put on the ground floor. Now there may be vacancies, and you have tenants ready and willing to move in, but the ordinance is so restrictive, the owner has to leave it vacant.”

Commercial real estate agent Darlene Kleckner said retail space is also in great demand in the Village.

“There is very little space available,” she said.

Kleckner added location is every bit as important in commercial real estate as it is in residential. Just a few blocks’ difference in location can translate into huge differences in rent costs.

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“On Prospect Street,” said Kleckner, “rents are up to $9 a square foot, whereas on Pearl Street or lower Girard, you’re probably looking at $3 a square foot. People don’t walk those blocks. That’s the key. The main trade is Girard and Prospect and within two blocks off Prospect.”

Bob Kuzman of Grubb & Ellis said the occupancy numbers for the third quarter of 2006 show the Village office market with a 6 percent vacancy rate. By contrast, Downtown San Diego’s vacancy rate was 10.7 percent at the end of the second quarter. Kuzman, however, noted that Downtown’s office market is nearly 10 times larger, 9.4 million square feet compared with the Village’s 993,000 square feet.

Office rents in Little Italy are running $2.50 per square foot, with parking stall charges of $160 to $180 per month, according to Pascal Aubry-Dumand, associate vice president with Burnham Real Estate Services.

Phil Wise with Colliers International said office and retail rents on Prospect Street are relatively high, partly because of the ocean views they offer. Office space is subdivided into Class A, B and C categories. Class A Village office buildings are state-of-the-art technologically and in interior design. Class B space is similar, without the bells and whistles. Class C office space tends to be anything off the beaten path in the Village commercial core.

Wise said a search of office space in May revealed that 98 percent of Class A Village office space was occupied. Class B office space in the Jewel was 92 to 93 percent occupied. Class C space was similarly filled with 94 percent occupancy.

“The market is constantly changing, though,” said Wise, “with less-sophisticated tenants dropping by the wayside and better, well-rounded merchants coming in.”

Wise said concentrations of merchants within an industry, such as Girard Avenue home-furnishing businesses like Roche-Bobois, Seaside Home, Everett Stunz, the Kreiss Collection and Ligne Roset, lead the way in combining to create a synergy benefiting all players.

In a competitive commercial real estate market like La Jolla’s, it’s difficult for tenants large or small to survive, let alone thrive.

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“It’s very hard to make ends meet,” said Diana Goedhuys, who along with her husband have owned Girard Gourmet for 19 years. “Anybody not part of a larger (corporate) core structure, doing it on their own, there’s very little out there to support the little guy. You’re going it alone, absolutely.”

Even multi-generational businesses in town, like Adelaide’s Florists & Decorators, find it tough keeping pace with rapidly rising rent in an increasingly competitive retail environment.

“So many of the buildings are putting condos on top and losing retail space,” said Adelaide’s owner Gina Phillips. “Parking is always an issue.”

Phillips said there is a widely held misconception that if a business owner is well off enough to open up shop in La Jolla, that means they’re going to get rich.

“It’s not that way at all,” she said. “We pay a tremendous amount of rent. We can’t go up anymore or build-out anymore with our existing space. There is no place to buy if you want to expand.”

Adelaide’s had to rent space on Fay Avenue in order to grow their business.

Kuzman of Grubb & Ellis said the Village can be divided into four commercial areas. Zone 1 on Girard and Prospect is the Boardwalk and Park Place of La Jolla and includes primary retail and visitor-oriented commercial. Zone 2 on Herschel Avenue has a mix of office and retail. Zone 3 consists of Fay Avenue, and Zone 4 includes Pearl Street and La Jolla Boulevard.

“There are restrictions in the different zones on what you can do,” Kuzman said. “Zone 1 is really restricted on office. They want major retail tenants. The ground floor can only be a maximum of 25 percent office. Zone 2 has no ground-floor restrictions. Zone 3 is 50 percent ground floor maximum office.”

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Kuzman said Prospect Street ground floor rents start out at an average of $6 per square foot on the very low end, going up to $8.50 per square foot for the Parisi shops.

“It’s a unique market,” he said. “Your tenants tend to be a little bit smaller, La Jolla residents who want offices within the Village or business specialists, stock brokerages, law firms.”

Burnham Real Estate’s Aubry-Dumand said La Jolla businesses don’t have it so bad with parking compared to counterparts Downtown.

“If you look at downtown San Diego,” he said, “they average about $160 per-month, per car for parking. La Jolla’s got free street parking.”

Aubry-Dumand foresees gradual improvements to the Village.

“We’ve actually seen some landlords buying properties, like La Jolla Galleria, and actually putting money into renovating the buildings,” he said. “By doing so, we’re able to get multiple, smaller tenants, law firms and certified public accountants, attracted by improvements made to the building.”

Real estate agent Wise believes the addition of more hotel rooms would boost the commercial market in the Village.

Despite inflation, Wise pointed out the Jewel will always have at least one factor working in its favor.

“It’s a great place to work and play,” he said.