Bradley K. Jones, CBRE
The San Diego retail market had another positive quarter, which built on the strength of the local economy. Strong job growth and low unemployment led to positive net absorption and a spike in sales activities.
The unemployment rate decreased across the board. San Diego posted a 4.9 percent rate, a post-recession low for overall unemployment. This is the first time San Diego unemployment has been sub-5 percent since the beginning of 2008. Local San Diego retail employment has been steadily increasing by 2.4 percent over the past five years, according to CBRE Econometric Advisors. Annual growth for the next five years, however, is expected to be relatively flat.
Despite the lack of space, there have been a few construction deliveries. Most of the current retail construction in San Diego is from mixed-use development and property renovations. Westfield plans to spend $500 million to expand its center at UTC. It will also spend $300 million in Carlsbad where it plans intends to transform an indoor mall into an open-air center. Regional malls are leading the trend, and smaller centers like Flower Hill Promenade and Del Mar Heights Town Center are keeping up with them.
One of the most significant signings this quarter was the entrance of Aldi into the San Diego market. They signed a 28,799-square-foot lease at North County Square, a centrally located power center that is anchored by Target and WalMmart. The Aldi concept is unique to the hyper-competitive Southern California grocery market. Its no-frills approach offers off-brand items at bargain-basement prices. What the consumer foregoes in experience they gain in savings, as opposed to other retailers that seek to offer an experience beyond traditional shopping.
While the grocery sector has always been strong, we saw restaurant sales surpass grocery store sales in the U.S. for the first time in 2014. We are seeing some innovative, fresh concepts entering the San Diego market, including Puesto, Cucina Enoteca, the Patio and the Pizza Studio. Full-service restaurants are experiencing a sharp increase in popularity, and are subsequently in high demand across the market. Restaurants are one of the most popular uses for San Diego retail product. This trend is forcing landlords to concede high tenant improvement (TI) allowances in their lease negotiations. Recent negotiations have closed around $100 per square foot in TI allowance ftor the most desirable operators in high-end submarkets, while the industry standard has sat around $30 per square foot in past years.
The San Diego retail market’s overall vacancy rate was 5.7 percent this quarter. This is down 250 basis points from the peak in the third quarter of 2011. As the market continues to tighten, vacancy will continue to improve.
About 90,375 square feet was absorbed this past quarter, marking the fourth consecutive quarter of positive net absorption. This can be attributed to the delivery of the Village at Pacific Highlands Ranch. This 163,560-sqaure-foot lifestyle center is 90 percent leased, with Trader Joe’s anchoring the big box space.
The market has significant capital – and with historically low interest rates, it is not a surprise to see sales activity for the quarter surpassing previous averages. There was a total of $276.1 million worth of retail product sold, which was 23.3 percent higher than the four quarter average for 2014, which was $224 million. In fact, a few sales that closed after the quarter ended pushed year-to-date sales volume above the 2014 total – and we’re only half way through the year!
Landlords and developers are rethinking the traditional shopping center experience in this ever-changing retail climate due, in part, to the increasing strength of ecommerce. Retail is now about an experience. Developers are creating experiential spaces that feature fountains, fireplaces, playgrounds, outdoor living rooms and other creative amenities that give people a reason to stay at the center longer. The Village at Pacific Highlands Ranch is a great example of this trend, as it combines a future library, community garden, bocce ball court, kids play area and a dog park.
By Bradley K. Jones, First Vice President, Retail – Specialty Service, CBRE. This story originally appeared in the September 2015 issue of Western Real Estate Business magazine.