The city of San Diego is close to inking two separate lease agreements that will allow it to vacate almost entirely the 54-year-old City Operations Buildings at 1222 First Ave. in the municipal core.
The contracts will relocate hundreds of staffers in the development services department from the rundown, city-owned property to modern office facilities downtown and in Mission Valley.
The proposed transactions come with a combined cost of $20.8 million over the lifetime of the short-term agreements. The sum does not include another $2.5 million in anticipated moving expenses associated with the Mission Valley location.
Thursday, San Diego’s four-person Land Use and Housing Committee voted unanimously to send the proposed leases — for the entire building at 7650 Mission Valley Road and two floors at 550 West C St. — to the full council for consideration. The action signals the city’s desire to exit its City Operations Building, or COB, and to spend millions on leased space while it advances a longer-term plan for a new City Hall complex.
“I haven’t been in COB in a long time and it wasn’t very pleasant. I can’t even imagine what it’s like now,” Councilmember Joe LaCava said at the meeting. “So despite the heroic efforts of (the development services department) to improve their sessions, they’re not working in a very good place. And so it is regrettable but understandable the need for outside space.”
San Diego’s Development Services Department, or DSD for short, is a public-facing branch with nine divisions. The department employs more than 700 workers and is actively seeking to grow its headcount to 776 people. Staffers review project plans, process permits for public and private developments, perform building inspections, and enforce building and land-use regulations.
Years ago, development services was slated to occupy the problematic 101 Ash St. tower, which remains vacant because of asbestos contamination. Instead, the department currently occupies five floors at the downtown operations building, where elevators are often out of commission and plumbing problems are said to create unpleasant bathroom experiences.
The operations building needs an estimated $45.2 million in deferred maintenance and improvements, according to a 2022 report by real estate consultant Jones Lang LaSalle. The building is also home to a fire station, Fire Station 1, that will remain in place. The facility, built in 1970, is estimated to cost $2.6 million a year to maintain, according to the JLL report.
City staff have negotiated two different office leases for DSD, with both contracts expected to commence in June, pending City Council approval.
As proposed, the department will relocate most of its public-serving operations to the two-story, 73,970-square-foot building at 7650 Mission Valley Road, which has room for 551 people. Here, the city is planning to sublease the H.G. Fenton-owned building from the current tenant, Wawanesa General Insurance Company Inc. for a term of four years and four months, ending September 2028.
The contract, which includes 580 surface parking spots, is expected to cost the city $10.2 million — $8.8 million in rent and $1.3 million in operating expenses — over the entire term.
The transaction will see the city pay $2.40 per square foot on a monthly basis for base rent, with base rate increasing 3 percent each year. The city has secured some concessions, including five months of free rent and use of Wawanesa’s ground-floor furniture and audio-visual equipment.
The city intends to occupy the Mission Valley facility even after it builds or buys a new City Hall complex and plans to negotiate a direct lease with the landlord at the end of its sublease, said Karen Johnson, an asset manager in the real estate department.
San Diego will also likely need to spend around $2.5 million to properly outfit the Mission Valley space — or $2.2 million on furniture and the rest on moving costs — before DSD is settled in the space, Ruixin Chen, who works in the Independent Budget Analyst’s office, told committee . The move-in funds have yet to be appropriated.
“The City Operations Building has long-outdated features, lacks many basic amenities and does not meet DSD’s operational needs with a growing workforce. The proposed leases could help the department to better serve the public and attract and retain its staff,” Chen said.
“The fiscal implication of the relocations should be fully considered. Additional funding could be required in the proposed budget to prepare the leased space and the relocations. Staff identified $2.5 million in need for tenant improvements at the Mission Valley space,” she said. “If the lease agreements are executed but this resource request cannot be met in the proposed budget, the city could run the risk of having to pay for empty space.”
The remaining 225 DSD staffers are expected to be moved to two full floors with 43,460 square feet of total space at the 550 West C St. tower near the Santa Fe Depot train station downtown, where the city has negotiated a direct lease with the landlord, 550 Corporate Center Investment Group. The building, rebranded as Five50West, is owned by the Alaska Permanent Fund Corporation. The pension fund last year spent $13.4 million on a Gensler-designed remodel, which introduced an outdoor cafe, a lobby bar and an upscale gym with spa-style locker rooms.
The proposed transaction, which includes 87 parking spaces, is projected to cost the city $10.6 million — $10.4 million in rent and $167,321 for operating expenses — over a term of 5 years and 7 months, starting in June.
Under the lease, the city will pay $3.65 per square foot on a monthly basis for base rent, with base rent increasing 3.5 percent annually. Here, the city has negotiated seven months of free rent and a large tenant improvement allowance, with up to $1.7 million in move-in costs covered by the landlord. The city also has the option to renew the downtown office lease for two, five-year .
The lease , as presented, are representative of transactions in the downtown and Mission Valley markets, said Joshua Ohl, who is the senior director of market analytics for real estate tracker CoStar.
With the deals, San Diego expects to spend just $184,518.50 in the current fiscal year ending June 30, with rent payments spread out over future fiscal years. Most of the current and future rent payments, or nearly 88 percent, will be made using DSD’s enterprise fund. The fund collects fees charged for city services. The city’s general fund will be on the hook for 12 percent of charges.
It’s unclear when the city would occupy the leased spaces.
“Once the leases have commenced in June, the city will use the city procurement process to hire an outside architectural firm to make plans and a private construction company to make tenant improvements, to deliver a customer-facing service center in Mission Valley necessary for business operations,” Elyse Lowe, who runs the development services department, told the Union-Tribune.
The office leases come as the city continues to evaluate how and where to house its downtown workforce, which is currently spread out between COB, the City istration Building (aka City Hall), the Civic Center Plaza office tower and a handful of leased sites in the downtown area.
San Diego, at the direction of Mayor Todd Gloria, last year pressed forward with a two-pronged approach to offload five, city-owned blocks in the city’s municipal core to pay for a replacement headquarters for all downtown employees. The blocks, however, mostly failed to garner developer interest and are expected to be marketed for sale or lease later this year.
At the same time, city consultant P3 Advisors is analyzing whether San Diego would be better off building a new City Hall complex or buying an existing downtown property. The report is slated to be completed at the end of the month.
