San Diego’s retail market has remained relatively level for the past year in regards to leasing and sales of shopping centers. Last year the vacancy rate for San Diego hovered around 5.2 percent and currently is positioned at 5.1 percent. This will probably remain the same throughout the remainder of this year as we continue to see very few additional centers being built. A steady flow of tenants are also closing their doors as new tenants and entrepreneurs venture into new careers.
Sales activity from the beginning of this year has been slightly slower but slightly better on a per-square-foot number than the same period one year ago. Year-to-date, we have seen 15 sales of centers that are larger than 10,000 square feet, with an average price per square foot of $193.50 and an average cap rate of 7.24 percent. This is compared to the same period last year which produced 22 sales at an average price per square foot of $170.39 and an average cap rate of 7.6 percent. As far as credit-tenant, triple-net investments in San Diego go, there is still a very strong demand for any product that comes on the market and typically results in multiple bidders. With the cost of funds remaining low, this will continue to fuel the sales market and keep investors in the market even if pricing experiences lower-than-usual cap rates.
A lot of the leasing activity has come from the entry of new franchises coming to the market. This is not the first time we have seen a flurry of franchise interest in a down market. In the early ‘90s we were in a similar economic situation. Banks were in trouble, businesses were in trouble and people everywhere were losing their jobs. So we are now seeing, just like we did in the early ‘90s, that people do not want to leave their fate in the hands of their employers. Many have therefore ventured into the franchise world where they can feel like they’re more in control of their future. This has caused a rush of franchises like Jersey Mike’s Subs, Quiznos (who is coming back to the market), Wingstop, Flippin’ Pizza, Sizzler and Genghis Grill, to look toward San Diego for new locations.
Since San Diego had maintained a low vacancy rate, around 2.5 percent, during the good times, it had caused some barriers to entry for many companies that would have liked to expand in the county but couldn’t. Now that more properties are available and leasing rates are lower, many of these companies have been able to come in and lease a lot of the larger space that has come on the market. This has enabled us to maintain a relatively low vacancy rate through these times.
Some of the more active tenants have been Dollar Tree, O’Reilly Auto Parts, 99 Cent Only, Family Dollar, Sherwin Williams, Fallas Paredes and dd’s Discount. The remainder of 2012 will most likely continue at the same level of activity without a noticeable increase or decrease in transactions.
— Marc Dudzik, Principal, Lee & Associates San Diego