Insight

Finding a Better Way

The I-15 Corridor Gives Businesses Access to Favorable and Employee Friendly Locations

May 22, 2015

By LOU HIRSH

Friday, May 22, 2015


David Hoppen, chief operating officer of ICW Group Insurance Cos., stands inside the company's new, leased headquarters on Innovation Drive in Carmel Mountain Ranch near Interstate 15.

San Diego’s Interstate 15 corridor has quietly emerged as a major center of office leasing, office purchase and office development for numerous industries, due in part to the area’s relatively lower housing prices and easier commutes.

The list of pending new arrivals in the neighborhood includes companies such as San Diego-based ICW Group Insurance Cos., which is preparing to move its longtime headquarters from Carmel Valley to the eastern end of state Route 56, off I-15.

Effective in the third quarter of 2016, following a gradual transition, Chief Operating Officer David Hoppen said the new leased headquarters — in an office complex on Innovation Drive in Carmel Mountain Ranch — will initially house 350 of the insurer’s 700 U.S. employees, but that number will eventually grow to at least 400.

“We decided to do this for the benefit of our employees,” Hoppen said. “We were very mindful of the commutes that our people are making to get to work every day.”

After a “hot-mapping” to determine where most of the company’s executives and workers live, Hoppen said ICW and its brokers Cresa at concluded that relocating to the I-15 corridor would make sense. While the company enjoyed its ocean-adjacent Carmel Valley surroundings, the new location puts most of its workers in position for quicker commutes and lots of nearby shopping, health-care services and other amenities in Carmel Mountain Ranch.

The Prices Are Right

They will also be closer to a larger variety of relatively affordable homes and apartments in that neighborhood and nearby 4-S Ranch, Rancho Bernardo and Poway. The company itself will be able to shape the new 72,000-square-foot office — akin to a blank slate — to more efficiently meet its specific administrative, security and privacy needs in a space that will actually be slightly smaller than its current home.

Increasingly in San Diego County, “location, location” is taking on added business urgency among companies looking to set up operations where they can avoid traffic, housing-affordability issues and time-efficiency problems that have long plagued several portions of the region. Brokers say the I-15 corridor — generally consisting of office and industrial neighborhoods along a 10-mile stretch of the interstate from Rancho Bernardo to Scripps Ranch — is fitting the bill for many of those businesses.

Commercial brokerage company JLL notes that of the nearly 376,000 square feet of office leasing deals made within the city of San Diego during the first quarter of 2015, the biggest chunk — 37.4 percent — took place in Rancho Bernardo. The third-biggest slice — 16.1 percent — happened in the Scripps Ranch neighborhood. (Kearny Mesa, classified by local brokers as Central San Diego, came in second at 25.9 percent).

Half of the quarter’s 10 largest local lease transactions took place along the I-15 corridor, including video-game maker Daybreak Game Co.’s leasing of 69,967 square feet and National University’s leasing of 34,176 square feet, both in Rancho Bernardo.

Scripps Ranch during the quarter saw deals made for 34,536 square feet by audio technology provider Turtle Beach Corp., and 26,081 square feet by MedImpact HealthCare Systems Inc., among others.

Family Formation Friendly

Geography and lifestyle choices have played major roles in the corridor’s rising prominence. Rancho Bernardo and Poway in particular are seeing interest from owners and executives of locally based companies of all sizes, as well as their employees, drawn to affordable housing, particularly if they are starting families.

“You have a good quality of life and good-sized homes that are relatively affordable compared to places like the coastal markets,” said Chris Williams, an associate vice president with Colliers International who represents several tenants and landlords in the North County region.

“People are always saying the millennials like the more urban spaces, but that gets tougher once you start to have kids,” said Williams, a former engineer and current Poway resident in his early 30s with two young children and one on the way. “The rooms start to fill up and you find that you need a yard.”

In addition, brokers said the corridor’s position makes it relatively easy for workers and executives living to the west to access it from coastal markets via state Route 56. Those commuters are going against traffic in the morning and evening with a relatively fast trip, compared with severe back-ups facing east-to-west travelers on Route 56 on most mornings.

Combine that with extensive widening and other improvements made to I-15 during the past three years — easing access from North County, South County and neighboring counties — and brokers say commuters from all directions are having a relatively headache-free ride compared with the situation that now exists along Interstates 805 and 5 during rush hours.

I-805 traffic congestion is cited frequently by employers and workers in office submarkets including Sorrento Mesa, Sorrento Valley and University Towne Center, and the frustration has played a big part in sending more of those employers toward Rancho Bernardo, Scripps Ranch, Carmel Mountain Ranch, Sabre Springs and Poway.

Office rents have also been an attraction. For instance, Williams noted that Class A rents in the high-demand Del Mar Heights market, along with some other portions of Carmel Valley, are now trending in the range of $4 to $4.50 per square foot.

Rents in inland markets like Rancho Bernardo cratered severely during the depths of the recession, hitting lows of $1 to $1.50 per square foot even for Class A properties. They have since rebounded significantly but are still below several of the San Diego coastal and central markets, currently ranging from about $2.50 to $3 per square foot in the I-15 corridor.

On Stable Ground

Jay Alexander, managing director in the San Diego office of JLL, said the I-15 corridor has traditionally had a steady balance between supply and demand, with a diverse tenant mix, and has managed to avoid the boom-and-bust phases seen in many submarkets around the county.

The corridor’s total vacancy rate was at 12.8 percent at the end of the first quarter, below the countywide rate of 13.5 percent. With increasing popularity, there is likely to be reduced availability and rising rents, as new office construction remains rare.

However, Alexander estimated that Class A rents in the corridor would need to reach at least $3.25 per square foot to make significant new office construction projects pencil-out, and the market is not there yet.

“It’s a very steady and stable market with well-balanced fundamentals,” Alexander said. “We’re just running out of existing buildings there.”

CBRE Group Inc. First Vice President Ryan Egli noted that Rancho Bernardo’s Class A vacancy rate now stands at 3.5 percent, among the lowest in San Diego County, and that fact will likely continue to drive up rents in coming months for both Class A and Class B properties.

The I-15 corridor is gaining favor among companies in a variety of industry sectors, including technology, health care and financial services. “It’s really in the center of where many of their workers live,” Egli said.

JLL reported that since the end of 2014, tenant demand in the I-15 corridor has increased by more than 56 percent. There are nearly 730,000 square feet of what brokers refer to as “active requirements,” with industries including defense, health care, technology and engineering scouting for space in the corridor.

According to various brokerage reports, companies seeking out future new space and recently touring that area include Scripps Health, Northrop Grumman Corp., aerospace contractor Rockwell, Renovate America, D&K Engineering and T-Rex Engineering.

Health Care in the Corridor
Some health-care providers are already making moves to boost services closer to their growing consumer bases in northern San Diego. Michael Labelle, senior vice president and San Diego branch manager for brokerage firm Savills Studley, pointed to locally based Scripps Health’s recent purchase of a 130,000-square-foot Rancho Bernardo building — formerly home to Chase Bank’s mortgage division — where the health-care provider is setting up a large new customer support center.

Not far from that location, medical group Sharp Rees Stealy has plans to relocate one of its local office facilities to a new commercial center being developed just off I-15 at West Bernardo Drive, on a site that formerly housed a Hooters restaurant and a Rodeway Inn hotel. Sharp Rees Stealy plans to occupy 100,000 square feet of the commercial project being built by local development firm Lankford & Associates and HP Investors, with an expected 2017 opening date, Labelle said.

Brokers also note the ongoing work in Rancho Bernardo by locally based Petco Animal Supplies Inc., which is in the midst of overhauling a 300,000 square foot building it purchased last year on Via Frontera. The former Unisys Corp. facility is expected to open later this year as Petco’s new corporate headquarters and support center, as 650 employees relocate from other sites in the local region.

Users of industrial and research-and-development space are also keeping I-15 corridor real estate in high demand, especially in Rancho Bernardo and Poway. Alexander said those include makers of defense-related drone technologies, such as Northrop Grumman and General Atomics, along with companies tied to the software and microchip industries, such as Cymer Inc. Those and others have been expanding their existing I-15 operations over the past three years.

Williams noted that Poway is primarily an industrial market based on its inventory, and its five office buildings considered close to I-15 are all at near-full occupancy.

Brokers said there are no major office or industrial projects currently under construction along the corridor, but some large developments are in the pipeline.

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