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Lease Rates Are Expected to Continue Upward Trend In San Diego Area

San Diego County CA— According to CBRE’s research, the San Diego retail market saw average asking lease rates grow this quarter, despite negative net absorption and increased vacancy.

Leasing activity was stable with national tenants such as Aldi, Grocery Outlet, 24 Hour Fitness, Equinox and Planet Fitness signing throughout the market. As several centers are undergoing redevelopment and securing desirable tenants, lease rates are expected to continue their upward trend. CBRE Econometric Advisors forecasts that asking rates will reach their pre-recession peak of $2.41 by Q4 2017.

The grocery store industry in San Diego, as well as the California market as a whole, is in the midst of a shake-up due to the Haggen-Albertsons deal. After filing for Chapter 11 bankruptcy in early September, Haggen announced plans to close all newly acquired stores in order to ensure success at the 37 remaining stores in Washington and Oregon. In the San Diego market, the closings will translate to 25 dark Haggen stores and 1,200 layoffs. Much like the recent Fresh & Easy story, existing grocers Gelson’s and Smart & Final have already placed bids to purchase a number of these stores.

“The landlords of grocery-anchored centers that are losing an anchor will be eager to backfill these spaces in a timely manner in order to maintain traffic to the center and continue to see a growth in both occupancy and rental rates,” said Bradley Jones, first vice president of CBRE in the San Diego region.

For the sixth consecutive quarter, average asking lease rates in the San Diego retail market saw an increase. The average asking rate this quarter is $2.10, representing a year-over-year gain of $0.30 or 16.7 percent. Despite steady growth, rates have not yet reached the pre-recession peak of $2.41, signifying potential for additional growth. San Diego’s desirable submarkets: Encinitas, Del Mar/Solana Beach, Downtown/Hillcrest, UTC, La Jolla, Mission Valley and Pacific Beach are the driver of rent growth, increasing $0.85 from Q2 2015.

After four quarters of positive net absorption, 58,872 square feet of negative net absorption occurred this quarter. North County saw the majority of the negative activity due to several mid-size tenants vacating space. Despite this quarter’s negative net absorption, North County’s construction deliveries produced the majority of San Diego’s 364,979 square feet of year-to-date positive net absorption. The Village at Pacific Highlands Ranch and La Costa Town Square were both delivered more than 80 percent pre-leased showing there is demand for new retail space, but existing inventory did not fit the tenant’s criteria. Similarly, several centers around San Diego County are being redeveloped in an effort to stay competitive and attract new tenants.

The San Diego retail market’s overall vacancy rate was 5.8 percent in Q3 2015, up 10 bps from Q2 2015. However, the vacancy rate is unchanged year-over-year. Despite seeing negative net absorption, Central San Diego posted the lowest overall vacancy once again, closing Q3 2015 at 3.3 percent. The downtown submarket saw the largest year-over-year improvement, decreasing 110 bps to 7.3 percent. In the Rancho Bernardo submarket, Del Sur Town Center, which is anchored by Target, is being developed by Shea Properties and is anticipated to total 210,000 square feet upon completion.

Despite limited new construction, several redevelopment projects are occurring throughout the market in an effort to improve consumers’ experience and compete with the newer retail centers. These projects include Beacon La Costa, the Shops at La Jolla Village, Westfield UTC and Westfield Carlsbad. The Shops at La Jolla Village will tear down 38,000-square-foot of existing shop space to make room for three buildings totaling 44,000 square feet. Nordstrom Rack will be a new tenant as part of the renovation, replacing Landmark Theater. Westfield recently commenced Phase two of redevelopment at their UTC mall, which is scheduled for completion in 2017. This large scale renovation comes on the heels of the $180 million Phase one revitalization along with the $300 million renovation of Westfield Carlsbad.

To view the San Diego Retail Market View report from CBRE, click on the [Link]