Firm accounts for downtown departure: area's ability to retain major corporate tenants in question as Ernst & Young plans to relocate

San Diego Business Journal, Feb 14, 2005 by Heather Bergman

When one of Downtown's better-known tenants announced plans in late January to pack up its West Broadway office and relocate to the suburbs, some questioned whether this business hub would ever attract and maintain major corporate tenants.

So far, the answer is mixed.

Ernst & Young LLP, one of the nation's Big 4 accounting firms--and Downtown San Diego's third-largest accounting-firm office tenant on a square-footage basis--announced it is vacating its 30,000 square feet of office space at 501 W. Broadway in June.

The New York-based Ernst & Young will break its 15-year lease, which is due to expire in June, and head for University Towne Centre, where it has signed a 10-year, $10.8 million lease to occupy the third and fifth floors of a building in the Plaza at La Jolla Village, owned and operated by Chicago-based Equity Office Properties.

"In a service business, you have to have access to your clients and the fact is, it is a long way from Carlsbad to Downtown," said John Belli, the managing partner at Ernst & Young's San Diego office. All 190 employees in the Downtown office will make the move.

Ernst & Young's San Diego tax and audit groups serve a gamut of industries, but its clients are concentrated in biotech and life sciences, high-tech, and consumer products, which are typically located in areas such as Carlsbad and Sorrento Valley, Belli said.

"When it came down to it, we had one client Downtown," he said.

Ernst & Young had been a Downtown fixture since it opened an office there in the late 1950s, said Belli. "But our client base is a lot different than it was in the '80s, when we last renewed our lease," and certainly different than it was in the '50s, he added.

All four of the nation's Big 4 accounting firms have offices in Downtown San Diego. The top two accounting firms on a square-footage basis are New York-based Deloitte & Touche and the Netherlands-based KPMG, each accounting for more than 40,000 square feet of leased space, according to Babak Sammak, a research analyst at Los Angeles-based CB Richard Ellis. New York-based PricewaterhouseCoopers is the smallest of the four, he said.

Unlike the downtowns of many large U.S. cities such as Atlanta and Boston, the heart of San Diego's Downtown business district is not the home of many of the region's major corporations.

Critical engines of growth in the region, including biotech, wireless technology and defense industries, are concentrated in suburban areas, according to local real estate analysts.

"When outside investors look at San Diego's Downtown (office) market, one of the first things they ask is: How many Fortune 500 companies (operate) there? And the second thing they ask is: How many of these corporations are headquartered there?" said Michael Robb, the executive vice president of the real estate division at Pacific Life Insurance Co., a Newport Beach-based firm that furnishes loans to developers on projects Downtown.

"And I can't think of one," he added.

Robb captures a common sentiment.

In reality, out of the three Fortune 500 companies that call San Diego home, only one, Sempra Energy, has its headquarters Downtown. Sempra occupies nearly 350,000 square feet, or 3.3 percent, of Downtown's total office space. The other two Fortune 500 firms based in San Diego are Qualcomm Inc. and Science Applications International Corp.

With roughly 10.6 million total square feet of office space, according to San Diego-based Burnham Real Estate, the Downtown area is by far the region's largest office market. From a statistical standpoint, it is also a healthy market, with an improved vacancy rate well below 10 percent in 2004, compared with 11.5 percent in 2003, according to Burnham.

Two new high-rise office buildings scheduled for completion during the next two years will add significant for-lease office space Downtown, but there is concern that it will not be sufficient to attract large corporations, according to some Downtown brokers.

The first building, San Diego-based Lankford & Associates' Broadway 655, is a $140 million project that will add 365,000 square feet of office space. It is scheduled for completion this summer, and, as of January it was about 50 percent leased.

The second building, San Diego-based Cisterra Partners' DiamondView Tower, will provide 232,000 square feet of office space that will be ready by 2007.

According to Jason Hughes, a broker who represents tenants looking for space and a principal at San Diego-based Irving Hughes, "This (new office space) is not very much new product to accommodate any type of large suburban user."

So, the question of whether Downtown will ever become an economic hub for the region, remains.

Not A 'Leaving Downtown Story'

But for Ernst & Young, at least, this is not necessarily a "leaving Downtown story," Belli said.

After the firm performed analyses, running the ZIP codes of its clients and employees through a statistical program, it became clear that the office needed to be north of Downtown, Belli said. Ernst & Young found that more than 95 percent of its clients are located north of the Interstate 5-Interstate 805 merge, and roughly the same proportion of its 190 employees live north of Downtown. Belli said Ernst & Young considered three office markets--University Towne Centre, Carmel Valley and Downtown--before deciding on UTC.