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The San Diego retail market has always been one of the strongest markets in the nation with respect to commercial real estate indicators. Many regions greatly affected by the housing downturn like Las Vegas and Phoenix are still experiencing double-digit retail vacancy rates, while San Diego ended 2012 with an overall vacancy rate of 7.1 percent. Even the overall availability rate dropped to 9.5 percent, down from 9.7 percent last quarter and 10.6 percent at the end of fourth quarter 2011.
Since the beginning of 2012, both power centers and community centers have outperformed the rest of the market. Vacancy rates came in at 2.4 percent and 6.1 percent, respectively, with both rates representing decreases compared to last quarter and last year. Net absorption for these two products accounted for about 82 percent of the total activity in 2012. Other center types, such as specialty centers and strip centers, have experienced mixed results throughout the year.
The drop in vacancy rates can primarily be attributed to basic supply and demand. Many sectors of the retail market are becoming more creative and took advantage of market conditions during the downturn. Discount retailers are expanding in Southern California as Wal-Mart, Dollar Tree and Grocery Outlet aggressively seek locations throughout the region. Dollar Tree opened four locations within the county in 2012. Another store is scheduled to open in San Ysidro in early 2013. Similarly, Grocery Outlet has a 15,897-square-foot store scheduled to open at Poway Plaza in the second quarter of 2013.
Overall leasing activity continued to be relatively solid in the fourth quarter of 2012. Total net absorption was about 280,000 square feet, bringing the year-to-date total to 617,000 square feet. This was the sixth consecutive quarter of positive net absorption and the ninth quarter of positive activity over the past 10 quarters. Neighborhood and community centers provided the bulk of the fourth quarter activity, accounting for 99 percent of the overall total with 278,000 square feet. However, for the cumulative total of 2012, power centers led the way with 322,000 square feet (52 percent). The North County market experienced solid levels with 344,000 square feet of activity for the year, followed by East County (94,000 square feet) and South San Diego (70,000 square feet).
The asking average lease rate continued to inch up, ending the year at $1.77 per square foot, triple net. This was an increase of 4 cents compared to last quarter and an increase of 2 cents compared to last year. The 12-month growth rate is equivalent to 1.1 percent. However, the three-year average rent growth is negative 4 percent per year, as the average asking lease rate is still well below the pre-recession highs between $2.35 and $2.45 per square foot. According to CBRE Econometric Advisors, retail rent growth in 2013 is expected to be flat with an annual projection of 0.8 percent.
— Gary Baragona, Research Manager, CBRE Southern California