Like a lot of retail centers across the country prior to the pandemic, both Westfield Horton Plaza and Costa Verde Center in San Diego had seen better days.
Westfield Horton, known as downtown San Diego’s first successful retail complex, was struggling to attract shoppers and as a result lost primary tenants Nordstrom and Macy’s, while Costa Verde had better demand but needed rejuvenation as it approached its 30th birthday. A pair of developers thought they had a solution: buy up the stale properties and transform them into the modern work-live-play mixed-use centers that were all the rage at the time.
Westfield would become the Campus at Horton, centered around gleaming new office towers. Costa Verde would be a hub for what seemed to be a burgeoning biotechnology industry.
Neither of those visions has materialized, with one developer in danger of losing control of its property while the other decided to sell the property before it could make a conversion a reality. Their plight offers a window into the difficulties firms face in repurposing real estate at a time when business priorities are shifting rapidly.
When the Campus at Horton was first proposed in 2018, remote work policies were rare. The office was still a daytime destination. Similarly, when Alexandria sought to turn Costa Verde into a biotech hub, demand for such space was soaring.
But in a few short years all that changed. Now, U.S. investors are grappling with historic office vacancy rates, expensive borrowing costs, rising apartment rents, changing shopper habits in the wake of the e-commerce boom and an oversupply of biotech space as interest in the sector has taken a hit, to name a few.
Uncertain futures
Those headwinds have made it challenging for investors to gauge what the highest-demand and best uses are for their own redevelopment projects involving older sites.
Developer Stockdale Capital Partners faces foreclosure on a loan with a balance topping $350 million if it doesn’t come current on payments on its mixed-use redevelopment of the former Westfield Horton Plaza mall into the Campus at Horton, nearing completion in downtown San Diego after more than $550 million in investments by Stockdale.
The redevelopment of the former Costa Verde Center retail property in University Town Center is also in flux after property owner Alexandria Real Estate Equities, a prominent national investor and operator of biotech real estate, sold the property for $124 million, slightly less than the $125 million that it paid in 2022, CoStar data shows.
Joshua Ohl, senior director of market analytics for CoStar in San Diego, said developers may be realizing that retail, residential and other types of uses will be crucial to future redevelopments, especially until biotech and other office demand picks up again.
Costa Verde, for instance, was among several local and national property dispositions by Alexandria during the past year.
“With the region saturated with new and available biotech space stretching from UTC to Sorrento Mesa, it may be that Alexandria chose not to pursue the mixed-use project that would have competed with other new projects that have begun delivering across the region,” Ohl said.
Debating best use
Alexandria initially filed plans with the city for a significant redevelopment of the former grocery-anchored shopping center into a mixed-use biotech campus, slated to include labs, offices and a hotel. The redevelopment didn't go forward, stemming from reasons that included a nationwide cooling in demand for life science space.
The nearly 14-acre property is fenced off and its empty buildings remain standing. Pasadena, California-based Alexandria did not respond to requests for comment, nor did the buyer of Costa Verde, an affiliate of London-based investment firm Global Mutual.
The San Diego Union-Tribune reported that Global Mutual has teamed with local development firm GM Residential to redevelop Costa Verde Center on a plan “that will transform the transit-oriented site into a dynamic mixed-use property,” with more details to be released later this year.
The mixed-use redevelopment of the former Westfield Horton Plaza mall, meanwhile, is in financial limbo as it nears completion in downtown San Diego, with more than 770,000 square feet of newly redeveloped office space yet to be leased after five years of construction by Stockdale.
Public document filings showed Beacon Default Management, trustee for investment firm Alliance Bernstein, recorded a notice of default in early February on a loan with a $351.2 million balance, taken out by Stockdale for its Campus at Horton. The 90-day notice of default gives Stockdale until May 7 to get back in good standing with the lender, otherwise a notice of sale will be published. Los Angeles-based Stockdale did not respond to requests from CoStar News to comment.
Analysts told CoStar News that both San Diego projects could end up being filled with elements that have shown far-higher demand in the region than offices, such as apartments and hotels.
“For some of these projects, you can see that’s already happening,” said Alan Nevin, director of economic research for development consulting firm Gafcon in San Diego. For instance, he noted there are now several apartment and mixed-use projects in various construction phases by various developers in the two blocks surrounding the Costa Verde property.
Stockdale Capital Partners has made several adjustments in a bid to bring in office tenants and otherwise make the Campus at Horton more feasible since purchasing the former Westfield mall for $175 million in 2018.
It made efforts, for example, to bring in biotech tenants by converting a former Nordstrom building at the mall into an office building suitable for life science lab use. In 2023, Stockdale announced plans to add 850 apartments to the development, though work has not started on that component.
It also announced the signing of several retail tenants including grocer Sprouts Farmers Market, fitness chain Studio Three and health-food chain SunLife Organics, slated to open this fall, though it has yet to land tenants for its more than 770,000 square feet of new office space.
“Campus at Horton came at a time when office demand downtown has cratered,” CoStar analyst Ohl said, referring to the neighborhood’s 35.1% vacancy rate. “Although retailers have committed to fill some of the space, it has had trouble attracting tenants.”
Mixed-use uncertainty
The San Diego demand shifts reflect those across the country. Though some developers have pushed to incorporate housing in their mixed-use mall redevelopments, a sharp nationwide contraction in construction financing has hindered efforts.
Beginning in early 2023, banks and other lenders scaled back significantly on multifamily construction loans, according to CoStar. Interest rates were prohibitively high for those still offering financing, making many proposed developments financially unviable.
Still, mixed-use redevelopments remain popular for developers due to consumer demand to live in centralized communities, according to a report by JLL.
Simon Property Group expects to spend $400 million to $500 million on major mall redevelopments by working with joint-venture partners in fiscal 2025, according to the real estate investment trust's CEO. That includes adding residences, hospitality and office space to retail properties, Simon said.
In California, Dallas-based Centennial aims to redevelop the 1 million-square-foot Valencia Town Center in Santa Clarita after buying the property for $199 million; and New York-based Brookfield Properties recently refinanced the Stonestown Galleria in San Francisco with plans to add 3,500 residential units to the site.
But challenging finance fundamentals and lowered demand for offices have stalled some high-profile mixed-use projects. In downtown Detroit, development of a 10-building, $1.5 billion mixed-use district near Little Caesars Arena, home of the Pistons and Red Wings, has stalled several times and is now nearly two years past its original planned start date.
Developers Olympia and Related Cos. cited lower demand for offices than originally anticipated when District Detroit was being planned, and rising costs have made some of the project's planned affordable housing units less feasible to develop. Developers said planning is now being swayed away from office and retail and more toward hotel and market-rate residential components.