Driven by job growth and tighter supply, San Diego County’s commercial real estate market for retail space is emerging as one of the nation’s more robust for landlords, a new report from broker Marcus and Millichap says.
The report, released this week, says that increasing biotech, business services and tourism employment is leading to gains in consumer spending. Newer projects such as One Paseo in Del Mar Heights and the Village at Pacific Highlands Ranch are set to tap into that market.
However, overall development of new space is limited in San Diego, leading to lower vacancy rates and higher rents, as tenants at the upper end want to capitalize on locals and tourists willing to spend.
The average asking rent was $22.79 per square foot in the second quarter, up 2.9 percent over the year, more than double San Diego’s most recent inflation rate. The report says rents are going to increase again this year as vacancy continues to tighten.
“There are certain supply constraints that we have in San Diego, it’s not like some of the secondary markets where there’s free flowing development, there’s really not a whole lot of (speculative) development that takes place in San Diego County,” said John Vorsheck, Marcus and Millichap’s regional manager for San Diego. “If you really look at it there was a little new development, which has led to improving fundamentals.”
Other notable developments include the $300 million renovation of the Westfield Carlsbad mall that will turn it from an indoor mall to an open-air shopping center; plans for a movie theater and event space at Liberty Station with completion scheduled for the fall; and downtown San Diego apartment construction that will add foot traffic and boost retail sales.
Gary London, president of the London Group Realty Advisors, said the Marcus and Millichap report is appropriately optimistic. However, the rosy outlook doesn’t apply to all shopping centers, because demand for retail space is concentrated at high-end malls catering to shoppers who spend more, he said.
“The losers are those centers and their tenants having a hard time competing against Internet competition, or older centers which are outmoded and outdated,” he said. “… The retail sector is in a transformative cycle. When the dust settles, there will be fewer centers. Those properties will become mixed-use, or other-purposed. The best retail properties will enjoy better metrics, however, and they will thrive.”
Looking at the economy, Marcus and Millichap says employment will grow 2.7 percent this year, adding 37,000 workers. That’s up from 35,500 added this year. Retailers and developers seem to be taking note. The county’s vacancy rate was 4.3 percent in the first quarter, down more than a half percentage point from last year. The county rate was also lower than the national average, which was above 6 percent. Tourism set a record in 2014, with 33.2 million visitors, making a $15.2 billion economic impact, the report says.
Marcus and Millichap reports that developers added more than 200,000 square feet of supply in the first quarter, about three quarters of the total coming in the Outlets at the Border. Construction is under way on 500,000 square feet of retail space.
