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San Diego’s Retail Market is Strong Despite Big Box Disruption

San Diego County CA—  According to CBRE’s research, fundamentals in the San Diego retail market were very strong this quarter. Asking rates remained flat, and have not decreased in eight consecutive quarters. Large positive net absorption was driven by Vons taking the final Haggens, and Empathy Charter School taking the vacant DMV building in Escondido. This quarter marked the final disruption of the Haggen exit from the San Diego market. The retail market is on pace for sustainable and steady growth as freshly redeveloped amenity rich centers get delivered, attracting desirable tenants.

The sporting goods industry continued to impact the San Diego retail market this quarter. Twelve Sports Authority and Sports Chalet stores closed due to bankruptcy, eight of them are still vacant, resulting in negative net absorption and more vacant big boxes on the market.  Sports Authority declared bankruptcy in March 2016, and then in May they announced the closure of all stores nationwide. Dick’s Sporting Goods won the bid for all of Sports Authority’s intellectual property which includes the name, 114 million customers’ files, its e-commerce site, and 25 million email addresses for a price of $15 million. Dick’s Sporting Goods is also taking three stores in San Diego County and TJ Maxx is taking one store. Leasing activity among big box spaces remained active throughout the quarter with eight spaces or 201,394 square feet absorbed this quarter.

“There was lots of movement in the retail market due to the sporting goods industry, the closure of some of these stores now provide opportunities for new anchors to either expand or enter the San Diego market,” said Carrie Bobb, vice president of CBRE’s San Diego region. “Another exciting retail opportunity in San Diego is One Paseo, this unique project will incorporate San Diego branded restaurants and retail shops as well as of office space and residential units.”

San Diego Retail average asking rates were flat quarter-over-quarter and increased 9.1 percent year-over-year to $2.16 triple net (NNN). This was largely due to a year-over-year increase of 22.1 percent to $3.58 NNN for power centers. Specialty centers decreased 35.7 percent in that same time period, but did not heavily influence overall statistics as they only account for 2.1 percent of total retail rental building area (RBA).

This quarter, net absorption for the San Diego retail market was 251,209 square feet. This was the strongest quarter since Q1 2015. Neighborhood centers had the highest positive net absorption since Q3 2014 with 126,017 square feet, a stark contrast to the negative 114,728 square feet of net absorption observed in Q2 2015.

Overall vacancy in the San Diego retail market decreased by 30 basis points (bps) from Q1 2016 to 5.5 percent. The drop in the overall vacancy marks a 20 bps decrease year-over-year and a 270 bps decrease from the peak of 8.2 percent in Q3 2011. This quarter marks the lowest vacancy rate since Q3 2008. Vacancy decreased in all regions year-over-year with the exception of Central San Diego which increased 40 bps to 3.9 percent.

There was no new under construction buildings or deliveries this quarter. The only construction activity was NW Village Creek in Mid City/El Cajon Blvd/University Ave submarket. There were several redevelopments occurring around the county with the largest one being Westfield UTC, which is slated to finish in Q3 2017. Other centers that were under renovation are Gateway Marketplace and Encinitas Village Square which will bring to the market 116,121 square feet and 26,207 square feet respectively. The mixed use center, One Paseo, at the corner of Del Mar Heights and El Camino Real was revised and approved by the city board and Kilroy plans to break ground within the next year.

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