— By Reg Kobzi, Senior Vice President, CBRE —
Despite economic headwinds and uncertainty, there remains a positive sentiment within the San Diego retail market due to the historically low vacancies that continue to persist quarter over quarter.
Inflation across consumer categories erodes spending power and challenges the retail landscape, as well as the greater economy. Landlords proactively track consumer spending and tenant resilience to mitigate risk. Inflation has proven stubbornly high, but it is predicted to decline over the coming months as the economy cools. CBRE believes the rate hiking cycle is nearing an end, and the Feds should start to cut rates by the end of the year.
Despite the economic challenges, San Diego is healthy as its unemployment rate has remained relatively steady and seen significantly less expansion than at the state and national levels. June is the 35th consecutive month that unemployment in San Diego was below the state norm and the 12th straight month below the U.S. average.
San Diego retail vacancy stabilized at the beginning of 2023, mirroring the rate from the last quarter of 2022 of 4.9 percent. Since vacancy rates are indicators of the market’s overall health, this stabilization is a valuable sign that the market remained strong through the first quarter of this year. This marked a 60 basis point decrease in a year-over-year comparison when the vacancy rate was 5.5 percent — the lowest in 15 years.
The second and third quarters of 2022 saw record retail property sales levels in San Diego County amounting to more than $1 billion in total sales. This year has been much slower because of interest rate hikes, resulting in less than $200 million in trades so far, even though retail investments have been Southern California’s highest-yielding asset class.
The effect of tourism on the San Diego retail market is also impressive. About 28.8 million annual visitors spend roughly $13.6 billion in the region. San Diego is considered a top U.S. travel destination, and the industry generates more than $1 billion annually in state and local transient occupancy, sales and property taxes.
Very little new product is being built for retail use in San Diego. The only project under construction is the downtown research and development district, RaDD. This project offers about 1.7 million square feet of lab, office and retail space. The project will be delivered in phases, with the first delivery expected around this year or early 2024. The retail portion will account for about 93,000 square feet of space.
The pandemic dampened retail’s strength, but it did not stop the market vibrancy in San Diego. With millions of visitors each year — not to mention the low vacancy rate and little new product delivered to the market — retail will continue to be a high-yielding asset class across the region.