San Diego has historically been a strong retail market with low vacancy and barriers to entry that restrict the supply of new centers. However, the market has not been immune to these difficult times. Rising unemployment and decreased home values have made consumers more cautious, leading to lower sales volumes for many retailers and restaurants creating slightly more vacancy throughout the area.
Expo Design Center, Linens ‘N Things, Circuit City and Mervyns are just a few of the big boxes that sit empty along with several former gas stations, Starbucks Coffee, Banner Mattresses, Baja Fresh and La Salsa locations. However, these vacancies created opportunities for Wal-Mart, Kohls, Best Buy, yogurt shops, taco shops and others to enter projects or trade areas that had proven difficult to enter. Many of these former restaurant locations still include the furniture, fixtures and equipment and have created excellent opportunities for new tenants to reopen with little upfront investment. This is particularly true in South County as many experienced restaurateurs and other business owners from Mexico are crossing the border to open businesses.
Tenants such as Autozone, Chase Bank, CVS/pharmacy, Gamestop, 7-Eleven and Five Guys are now taking advantage of the lower rents and increased landlord concessions to enter the area and/or expand their market share. Others like Vons, Petco, Staples and Anna’s Linens are expanding by shrinking their prototype size.
New development has slowed considerably. There are only a handful of projects currently under construction, including Whole Foods Marketplace in Encinitas, The Paseo in Carlsbad and the Mission & Douglas Center in Oceanside. Many other proposed projects seem to still be a year or more off, including the proposed Mercado del Barrio by Shea Properties adjacent to the Coronado bridge, Shamrock Group’s development of the vacant land adjacent to Las Americas Outlets in San Ysidro, the redevelopment of Balboa Mesa in Clairemont by Lupert-Adler, Terramar Retail Centers’ redevelopment of the Old Police Headquarters downtown and several projects by Sudberry Properties in National City and Scripps Ranch, as well as the Quarry Falls project in Mission Valley, a master plan that includes approximately 4,800 residential units, 500,000 square feet of office space and 500,000 square feet of retail.
San Diego’s investment market has been very quiet since late 2008/early 2009 as most investors are sitting on the sidelines waiting to see what happens with the capital markets and the maturing commercial loans coming due in the next several years. Although numerous projects are currently on the market, most buyers are still waiting for prices to drop further.
All things considered, San Diego still maintains an impressive overall vacancy rate of less than 5 percent, there are several exciting projects on the horizon, it has a diverse economy and will always be one of the most desirable places to live. As a result, San Diego’s retail environment will weather this storm and, in the long run, will remain one of the strongest markets in the country.
— Stewart Keith and Jon Horning are senior vice presidents at Flocke & Avoyer Commercial Real Estate in San Diego.