Leasing activity increased to 645,341 sq. ft., up 14.6 percent from last quarter
San Diego CA— According to CBRE’s research, the San Diego retail market had the highest asking rate on record in Q2 2018.
The San Diego retail market fundamentals provided some optimism with increased leasing activity and elevated asking rates. After a steep decline in Q1, the average asking rate increased significantly in Q2, up $0.13 to $2.39 triple net (NNN), which is the highest rate on record. Leasing activity reached 645,341 sq. ft., up 14.6 percent from Q1, driving the availability rate down 20 basis points (bps) to 7.0 percent. Several large leases were from new tenants replacing previous tenants, not vacant spaces, so they had no positive impact on absorption which was negative for the second straight quarter.
“The San Diego retail market remains strong with record high asking rates and increase leasing activity,” said Joe Yetter, first vice president of CBRE in San Diego. “Tenants continue to pursue higher grade properties which demand higher asking rates that are pushing average rental rates up. We are seeing asking rates for quality Class A shopping centers at an all-time high.”
In Q2 2018, net absorption remained negative at (83,225) sq. ft., bringing year-to-date net absorption to (97,327) sq. ft. There were also a few large vacancies this quarter that came to market, one being a former Sears in Carmel Mountain, which helped drive the vacancy rate up 10 bps to 4.7 percent.
Direct availability is at a post-recession low, asking rates can swing dramatically from quarter to quarter with only a small set of properties coming online or offline. The average asking lease rate increased significantly, up $0.13 (+5.8 percent) quarter over quarter to $2.39 NNN. Strip center rates increased significantly, up $0.14 (+7.5percent) to $2.02 NNN. This can be attributed to high priced availabilities coming online, such as at The La Jolla Marketplace and Otay Crossroads. Neighborhood centers slightly increased $0.08 (+4.0 percent) to $2.10 NNN, due to a large (43,794 sq. ft.) relatively high-priced availability coming online at The District at Eastlake. Downtown rates once again remained the highest at $2.92 NNN.
Despite the leasing momentum, total vacancy rates increased 10 bps quarter over quarter to 4.7 percent. This activity drove the total availability down to 7.0 percent, which is 20 bps lower than last quarter and 100 basis points lower than last year. Vacancy increased the most in Central San Diego, yet remained incredibly tight, where the total vacancy rate was 3.6 percent in Q2, up 60 bps quarter over quarter. This is likely due to the 107,259 sq. ft. vacancy coming online at a power center in Carmel Mountain
The Square at Bressi Ranch broke ground this quarter, with 90,000 sq. ft. set to deliver in Q4 of this year. There were not any new construction deliveries. The neighborhood center Millenia Town Center remains set to open in 2018 in Chula Vista and will consist of over 100,000 sq. ft., of retail space. This is part of a larger national trend of discount and off-price retailers expanding their presence, especially in lower income areas. The mixed-use neighborhood center One Paseo remains set to deliver in 2018, and will consist of 280,000 sq. ft. of office space and upscale residential units, creating immense exposure for retailers within the center.
Retailers are finding new ways to do more with fewer people by embracing e-commerce and utilizing omnichannel retail strategies that mesh online platforms with in-person experiences. There has been plenty of buzz about e-commerce disruption of brick-and-mortar, but savvy retailers are recognizing the opportunities of mixing these platforms. Omnichannel allows retailers to focus more space and personnel on the in-store experience by cutting down on inventory and leveraging e-commerce distribution. Previously exclusive e-commerce companies have started opening brick-and-mortar locations or partnering for store-in-store to access the benefits of omnichannel.
Labor market figures were generally positive for San Diego, with 32,500 jobs (+2.2 percent) added year over year. The unemployment rate fell to an 18-year low of 2.9 percent. Food service employers had 100 fewer employees’ year over year, while traditional retailers added 800 jobs.
Stagnant retail job growth is more a sign of employers adapting to technological change, tight labor market conditions and wage pressures than struggling sales. According to CBRE Econometric Advisors, retail sales grew by an estimated 3.8 percent year over year in Q2.