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The San Diego retail market has posted five consecutive quarters of positive net absorption with strong activity in power centers and several vacant big box spaces coming off the market. Through the third quarter of 2012, year-to-date gross leasing activity totals more than 1.8 million square feet with about 330,000 square feet of positive net absorption. So far, we have already surpassed the 2011 gross leasing total of about 1.4 million square feet. The steady leasing activity and positive net absorption dropped the direct vacancy rate from 7.4 percent at the beginning of the first quarter 2012 to 6.9 percent at the end of the third quarter. The current overall vacancy rate, including sublease space, is 7.2 percent.
Vacant big box spaces are attracting tenants from national credit retailers to specialty markets. Dick’s Sporting Goods recently opened a 46,019-square-foot location in a redevelopment of a former Mervyn’s site in the Sports Arena submarket. Meanwhile, Zion Market, a Korean-focused grocery and specialty store, subleased a vacant 94,000-square-foot Sears Essentials building in Kearny Mesa. In addition to tenants taking big box spaces, several high-end fashion retailers are entering the San Diego market or opening new stores. Kate Spade New York opened its second San Diego store in downtown La Jolla at the end of September, and Prada signed a lease for its first San Diego location in Fashion Valley Mall.
Retail construction activity has increased significantly over 2011 but is still historically low with only 167,118 square feet under construction and two projects scheduled for delivery in fourth quarter 2012. The Plaza at the Border in San Ysidro will deliver two buildings totaling 97,500 square feet in December. The Mercado del Barrio mixed-use project in the Barrio Logan submarket will deliver one phase in November with 36,718 square feet of street-level retail and three stories of apartments.
Flower Hill Promenade, an upscale lifestyle and retail center in Del Mar, added a 64,000-square-foot, mixed-use component this year called Flower Hill Professional Center. The two-story redevelopment project is 90 percent pre-leased, with Whole Foods nabbing the ground-floor space and a major healthcare provider leasing the second floor. Both tenants are tentatively scheduled to open in the first quarter 2013.
Through third quarter 2012, 15 multi-tenant retail centers have sold, totaling about $310 million. This includes the 189,321-square-foot Balboa Mesa Shopping Center, the 98,854-square-foot Bonita Centre and the 60,065-square-foot Del Mar Heights Village. Anchored by Vons, Kohls and CVS, Balboa Mesa was purchased by Regency Centers Corp. for $59.5 million. Donahue Schriber Realty Group purchased both Bonita Centre ($30.7 million) and Del Mar Heights Village ($40.7 million). The Del Mar Heights Village purchase included five multi-tenant buildings but did not include the center’s two anchor buildings.
From leasing activity to investment sales, San Diego’s retail market fundamentals are holding steady. They are anticipated to post moderate gains through the rest of the year and into 2013. With minimal new development in the pipeline and continued strong leasing activity, San Diego’s available retail supply should decrease, pushing rental rates higher in well-located centers.
— Reg Kobzi, senior vice president, CBRE San Diego