Construction Starting on Manchester’s $1.5B Navy Complex Project
Developer Doug Manchester’s long-stalled $1.5 billion plan to redevelop Navy property on San Diego’s waterfront with hotels, offices and restaurants will break ground next month.
Manchester Financial Group announced Thursday that it had secured the necessary financing to start construction of its Manchester Pacific Gateway development, regarded as the single largest and costliest project in downtown San Diego history.
The 3-million-square-foot project, which occupies eight city blocks, calls for multiple office towers, including a 17-story, 372,000-square-foot Navy headquarters; an 1,100-room convention hotel; a retail-lined “paseo;” and a museum on more than 12 acres south of Broadway between Pacific Highway and Harbor Drive.
Although Manchester, former publisher of the U-T, won a 99-year lease in 2006 to build out his project in return for building what will be a new $165 million Navy headquarters building, the mammoth development has been dogged by multiple lawsuits, which in turn made it almost impossible to obtain needed financing.
With the legal obstacles resolved, Manchester Financial has been working on securing financing over the past year. Rather than obtain a conventional loan, the developer is funding the entire $1.5 billion development with the help of outside equity partners, explained project manager Perry Dealy.
Those equity contributions, Dealy said, are coming from domestic investment funds tied to some of the largest Fortune 500 companies, including pension funds, but he would not disclose who they are. Manchester Financial Group, which will be managing general partner on the project, will also have an equity stake but at the end of the three-year construction period, it will be less than 50 percent, said Dealy.
The financing approach marks a departure from Manchester’s plan as recently as last October to secure a construction loan to help finance the development. Berkadia Hotels and Hospitality announced last October that it had been hired by Manchester Financial to source a $650 million construction loan for the project by the end of 2017.
Dealy said that the team ultimately decided the cost of a construction loan was too high and instead opted for an all-equity financing plan.
“The profitability to investors is substantially higher than if you went through a construction lender or a mezzanine lender,” he said. “It (equity financing) is unusual and it is a huge amount, which is why it took longer.”
In all, the project encompasses seven buildings, plus a 1.9-acre public park, replacing what is known as the Navy Broadway Complex, which the Navy has occupied since the early 1920s.
Early last year, the developer began demolishing some of those older buildings.
While work is starting on all parts of the project at the same time, completion of some of the office buildings, including the new Navy headquarters, is targeted for the end of 2020, with the remainder of the project expected to be done by mid-2021.
Other elements of the development include:
- A 29-story, 524,000-square-foot office tower
- Eight-story, 178,000-square-foot office building
- Six-story, 153,000-square-foot office tower
- 290,000 square feet of retail
- A 260-room luxury boutique hotel
With the financing now arranged, Dealy said that Manchester Financial Group can start finalizing future tenants, including the restaurants and occupants of the office buildings. Although the developer has attracted interest from major hospitality brands to manage the project’s two hotels, it is considering operating both as Manchester hotels, Dealy said.
Manchester, developer of some of San Diego’s highest profile hotels, including the Marriott Marquis San Diego Marina, Fairmont Grand Del Mar and Manchester Grand Hyatt, has had to overcome multiple legal challenges since signing on to the waterfront project, first conceived more than 30 years ago.
“In the 12 years that we have fought for this development, our enthusiasm and commitment has never wavered,” said Manchester, chairman emeritus of Manchester Financial Group, in a statement Thursday. “We have worked through extensive review from six public agencies including the City of San Diego, San Diego County, United States Navy, San Diego Unified Port District, Civic San Diego, and California Coastal Commission …The time has finally arrived for construction of a world-class venue for downtown San Diego.”
Over the years, waterfront activists and environmentalists have tried to kill the project, arguing that the land should have been returned to the city since its original use approved by voters in 1920 was for a supply center. Alternative uses have included suggestions for a park akin to Chicago’s Millennium Park or a new location for City Hall.
Critics also tried to make the case that a downtown location for the Navy building would represent a potential terrorist target and it should be built at a more-secure local military base.
The last of the legal wrangling over the project occurred in late 2016 when the U.S. Supreme Court declined to take up an appeal by the Navy Broadway Complex Coalition. It was hoping to have the court overturn an earlier Ninth Circuit ruling and make the U.S. military weigh the risks of a terrorist attack before proceeding with the development.
Rear Admiral Yancy B. Lindsey, Commander of Navy Region Southwest, called the planned transformation of its property “a big win for both the Navy and the city of San Diego. The Navy and San Diego have had a strong, mutually beneficial relationship for over 100 years. This project is another important chapter in that history.”
The project originated in the 1980s, when the Navy desired a new regional headquarters but could not gain an appropriation from Congress. Legislators eventually gave their consent to the Navy redevelopment plan, and the California Coastal Commission approved the project in the early 1990s. It later reversed itself in 2013, saying conditions downtown had changed so much that the project no longer complied with the state coastal law.
The commission sued the Navy and Manchester for reconsideration but later dropped the case after some changes in the plan were made.