Experiences Win Out Over Some Traditional Big Boxes in San Diego

There was a big shake-up in the big box world with long-time sporting goods staples Sports Chalet and Sports Authority shuttering stores across the county. Macy’s in Mission Valley is also closing, while Nordstrom is shutting down in downtown. Interestingly, Hobby Lobby and the large pet stores seem to be buffered by the big box epidemic. In Chula Vista, two long-time vacant big boxes were finally chopped up into four spaces to accommodate the mid-sized box users. The good news is that big, “boring” boxes are being replaced by big “experiences.”

Austin Dias, Duhs Commercial

Austin Dias, Duhs Commercial

Experiences, whether in a larger property or within a specific business, continue to be important for retailers and restaurants. Landlords across the county are making large investments to create experiences that will attract consumers. At the top end of the spectrum we have seen Westfield finally pulling the trigger on a massive remodel of the UTC mall, which will include more than 100 new stores and restaurants. Rouse purchased the Carlsbad mall from Westfield and has seemed to follow a similar business plan with its revamp, adding an exciting lineup of restaurants along the outside of the property. Liberty Station in Point Loma is coming into its prime with, you guessed it, experiences like the Lot restaurant/movie theatre, Liberty Public Market and a list of unique restaurants. Areas like Little Italy and North Park continue to be Millennial favorites with cutting-edge culinary themes and increasingly popular quick-service restaurants (QSRs).

Vacancy across the county steadily decreased by the end of the year to an incredibly low 3.8 percent from 4.6 percent at the start of the year. Most product types from high-end retail shopping centers to strip centers in need of capital investment are leasing up. Retail in some mixed-use projects has been one area of the market that has struggled to enjoy the leasing pace, hindered by limited parking options and low foot traffic. With the lower vacancy, it is a surprise to see that quoted rents are at $21.97 per square foot at the end of 2016, which is down 2.09 percent from the end of 2015. Capitalization rates have been lower in 2016, averaging 5.87 percent compared to the same period in 2015 when they averaged 6.58 percent. With limited new development and foreign capital’s focus on the U.S., especially after Brexit, capitalization rates will likely stay low.

Questions to Keep in Mind in 2017
• When will the residential affordability crisis, paired with stagnant income growth, begin to hurt retailers?
• Do the Millennials make the move to the suburbs this year with San Diego city schools still floundering? If so, will they bring with them a wave of new retail/restaurant concepts?
• What will happen with immigration, tourism, military and healthcare with the new administration?

The answers to these questions all have major repercussions in San Diego.

What to Watch in 2017
• QSRs and service-industry retailers will continue their growth. Think healthcare, Tender Greens, Poki, Chipotle, Pieology, Firehouse Subs, Jamba Juice, Starbucks.
• People will continue to eat out more often than they eat at home.
• Big boxes will continue to hold back, but mid-sized boxes will test the waters to see if they are the new shopping option of choice (Orchard Supply instead of Lowe’s; Ace instead of Home Depot).

— By Austin Dias, Vice President, Duhs Commercial. This article first appeared in the February 2017 issue of Western Real Estate Business magazine.

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