Improving office, hotel market could result in first phase opening in early-2015

Story by Roger Showley, Originally published May 5, 2011

Developer Douglas F. Manchester is dusting off his long-delayed plans for the multi-billion-dollar Pacific Gateway hotel-office complex downtown.

Perry Dealy, who gave an update Thursday at the Del Mar Rotary Club, said the improving economy makes it timely to move forward on the $1.6 billion, 2.9-million-square-foot complex on downtown’s North Embarcadero waterfront.

“We took it off the shelf with the depressed real estate market, the depressed financial community and the legal action on the project,” Dealy said. “We were just doing a small amount of work.”

But with office demand stabilizing and hotel values rising, he said, “We’re being a lot more aggressive” in getting ready to start construction.

Pacific Gateway is to be built on the site of the Navy Broadway Complex at the foot of Broadway and opposite the Midway Aircraft Carrier Museum. It is bounded by Broadway, Pacific Highway and Harbor Drive, current site of the Navy Broadway Complex serving the Navy’s southwest region.

The plans, approved by the Navy five years ago, still call for four office towers, three hotels, retail and restaurant space and a 41,000-square-foot museum space. Underground parking and a 1.9-acre park also are planned.

Manchester won a long-term lease in 2006 from the federal government in exchange for promising to build a new Navy headquarters on the site.

Perry said he is meeting next week with a hotel chain he declined to identify to solidify an agreement to operate the three hotels. Cushman & Wakefield has been hired to prelease the office space. And a financial adviser is narrowing the search for a financial partner to help underwrite the costs.

Manchester strengthened his own finances when he recently sold his interest for $570 million in the Manchester Grand Hyatt hotel north of the San Diego Convention Center. Manchester also was the developer on the neighboring Marriott Marquis and Marina, as well as a number of office buildings and the luxury Grand Del Mar hotel.

“Things are moving in the right direction,” Dealy said.

With action on a hotel operator and leasing moving into high gear this year, Dealy said, the Manchester team plans to begin processing detailed drawings through the Centre City Development Corp. in the first quarter of next year. If all goes well, construction on the first phase could start in the first quarter of 2013 and be completed two years later.

The first phase, valued at $850 million, would include the Navy building; an 1,058-room convention-style hotel and 193-room hotel next to the Navy building; a 211,000-square-foot speculative office building; 1,563 underground parking spaces; and 135,000 square feet of retail space.

The $750 million second phase, including the park at the southeast corner of Broadway and Harbor Drive, would move forward once the Navy moves into its new headquarters at that site.

It would include a 164-room hotel and 115,000-square-foot office building near Seaport Village, 136,000 square feet of retail and 1,425 more parking spaces.

However, market conditions will dictate the timing of the proposed 28-story, 574,000-square-foot signature office tower at Broadway and Pacific Highway. A similarly sized office tower is proposed just to the east in front of the Santa Fe Depot by the Irvine Co.

The go-ahead follows in the wake of other downtown developments, including the recently approved first phase of the North Embarcadero Visionary Plan and selection of a design for expanding the convention center.

“It’s obviously a depressed commercial market, both downtown and in the region,” Dealy said. “But this is a niche property, because it’s on the waterfront… It’s never going to have its views blocked and you can have signage (rights).”

He said there is a small group of tenants who would be willing to pay top price for that location. “A prestigious address will be important for them to make a decision to move into our master plan.”

Even if market conditions look favorable, Manchester still needs to overcome two lawsuits in federal court.

The Navy Broadway Complex Coalition environmental group won its demand for new environmental documents but is seeking to litigate other issues, such as the property’s susceptibilty to earthquakes and terrorist attacks and other issues, said cochairman Ian Trowbridge.

“I think Perry Dealy is being optimistic with his timeline and assuming he will be able to overcome that lawsuit that we have filed, and I don’t believe he will,” Trowbridge said.

The California Coastal Commission has appealed a federal court ruling that it has no jurisdiction in the case, since the development is on federal land and not subject to state coastal review.

Diana Lilly, spokeswoman for the commission’s local office, said a meeting is scheduled next week with Manchester representatives to discuss the project.

The project has a long history of stops and starts.

City voters gave the land to the Navy in 1920 and it became the Navy Supply Center for World War II and the local regional Navy headquarters.

Once supply center functions were relocated in the 1980s, Congress authorized the complex’s reuse in 1987 and the city approved the master plan in 1992. But progress stalled as a recession slowed development. Post-9/11 worries about terrorism to high-rise buildings led many financiers to pull back on new major developments.

When the Navy moved forward with the selection of Manchester in 2006, it missed the building window once again, as another, deeper recession led to rising vacancies and scant financing for commercial projects.

Dealy said he has been meeting with the Navy over the last few months to share findings on the state of the market.

This week’s killing of Osama bin Laden, while not related to the go-ahead, does offer some reassurance that security concerns might lessen in the near future.
“I think the more we do to defeat terrorism, the safer we all feel, including in real estate development,” Dealy said.