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City to sell East Village site for $8.5M; developer planning office campus

A rendering of Kilroy East Village.
A conceptual rendering of Kilroy East Village, a two-block office and retail project that would replace the Salvation Army facilities and the city’s Popular Market site.
(Courtesy, Kilroy Realty)

Kilroy Realty will use the city’s Popular Market property for a portion of its two-block tech or life science campus project, Kilroy East Village

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Kilroy Realty will buy a 20,000 square-foot, partial downtown block from the city of San Diego for $8.5 million. The acquisition will allow the firm to expand an in-the-works office project, ideally appealing to technology and life science companies who want more space for their workers in a post-COVID world.

Tuesday, City Council members voted unanimously to approve the deal for the site known as Popular Market at 951 Park Blvd. in East Village. The transaction, which is now expected to close in early 2021, will require the city to deposit proceeds into a fund reserved for subsidized housing projects.

Popular Market — located on the south side of Broadway between Park Boulevard and 13th Street — is next to the Salvation Army Family Store and is currently home to the 12th and Broadway Restaurant. It’s diagonally opposite the Smart Corner residential building and the City College Trolley Station.

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The site was originally purchased by San Diego’s former redevelopment agency for $1.1 million in 2001 and transferred to the city in 2013 after the agency’s dissolution. The transfer designated the property as a “housing asset,” meaning it must be used to advance the development of low- and moderate-income housing.

Los Angeles-based Kilroy Realty is a publicly traded real estate investment trust with a portfolio of 14.3 million square feet of primarily office and life science space. In San Diego, the firm is currently building Little Italy’s largest office building, known as 2100 Kettner, at a cost of $140 million.

With its latest downtown buy, Kilroy can increase the footprint of Kilroy East Village, an office and ground-floor retail effort that started with the developer’s $40 million purchase last year of the Salvation Army’s adjacent real estate holdings.

The project had been envisioned as between 600,000 square feet and 1 million square feet — or more than triple the size of the Little Italy building. Kilroy can now grow the East Village development to between 720,000 square feet and 1.2 million square feet, the company said. The extra land allows for more than 500 additional jobs and 25,000 square feet of shops, the firm noted in a presentation. It also provides the latest, in-demand amenity for companies: space to spread out.

“Large floor-plates allow for a health-focused, less-dense horizontal workspace canvas, and typically attract top tech and life science companies,” said Nelson Ackerly, an executive with Kilroy.

Rendering of the Kilroy East Village project
Kilroy’s planned office and ground-floor retail project, Kilroy East Village, is targeted at biotech businesses and started with the purchase of the Salvation Army’s real estate holdings. The 600,000 square-foot project will take over the two blocks bounded by Broadway, E Street, Park Blvd. and 14th Street.
(Courtesy, Kilroy Realty)

The project is a long-term bet on downtown as the future home for biotech firms, said real estate analyst Gary London.

“They’re banking on the fact that this concept of a life science and high technology hub establishing a base downtown could be real, and they want to be a player,” London said. “There’s no short-term demand for (office). They’re buying it for a future opportunity.”

It’s a move that appears to piggyback on the promise of IQHQ’s Research and Development District. In September, the biotech office developer purchased more than 8 acres of waterfront land to create a life science city along San Diego’s Bay.

It’s unclear whether Kilroy East Village will require additional city approvals; Ackerly said the firm is still hashing out the project’s design. Kilroy expects to complete the project in early to mid-2023, subject to market conditions, he said.

The city, meanwhile, believes selling the property to Kilroy — instead of building housing on it — is the best possible outcome. An analysis prepared by city adviser Keyser Marston Associates studied three different housing scenarios and concluded that a sale would maximize profits for the city, in part because of an active earthquake fault line that limits development. The firm also pegged the site’s fair market value at $8 million.

The transaction not only makes millions immediately available for the city’s affordable housing projects, but also ensures that the block is developed in a cohesive fashion, said Christina Bibler, San Diego’s director of economic development.

“The city had recognized that the site faced certain challenges as a stand-alone development site,” Bibler told the Union-Tribune. “The developer had acquired the balance of the block and approached the city as an adjacent property owner. Redevelopment law and city policy allow for disposition through an owner participation process, which does not require a solicitation of bids.”

At the Tuesday hearing, council members did not discuss the deal in detail or voice objections to the sale.

However, a public speaker with ties to the Mexican restaurant at the Popular Market site asked the council to hit pause on the sale. The small business is still grappling with pandemic-related challenges and could, with a new owner, be asked to vacate its storefront at any time, said David Gonzalez.

The 12th and Broadway Restaurant is leased to Jesse and Carol Gonzalez, who have been operating on a month-to-month term since 2003, the city said. The lease can be terminated with 30 days written notice. Staff has identified a number of sites that could serve as potential alternative locations for the restaurant, Bibler said.