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San Diego Retail Market Continues Long-Trend of Growth

Overall Vacancy Falls to Just 4.0%

Oceanside, Carlsbad among best performing sub-markets

San Diego County CA— Cushman & Wakefield’s newly released 1H-2018 Retail Market Report showcased an ongoing trend of positive momentum in the retail sector, with continued declining vacancy and solid occupancy growth. Beginning with 2H-16, the past four (4) half-year periods reported by the firm have combined to achieve more than one-half million square feet (sf) of uninterrupted growth. With its strong economic conditions fueled by diverse job growth plus its favorable demographics as well as climate, San Diego remains a prime destination for current and expanding retailers.

The region’s overall retail vacancy rate shed another 10 basis points (bps) since the close of 2017 to an even 4.0% at midyear 2018. San Diego’s retail vacancy has fallen 40 bps since a year ago and is now 320 bps below its peak of 7.2% recorded eight and a half years ago at the end of the last recession—since that period, tenants have now absorbed a whopping 2.1 million square feet (msf) across the county on a net basis.

“Getting the year going on a positive note, total retail occupancy increased by 42,000 square feet across all center types in the first half of 2018, similar to the first half of 2017 that saw 57,000 square feet of growth,” said Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego. “Notably, the growth in the first half of 2018 comes on the heels of six consecutive calendar years (since 2012) of steady occupancy gains.”

She added, “As vacancy continues to decrease further below the 5% mark, we may see some slowing but we don’t anticipate seeing any actual occupancy loss (negative absorption). This bottleneck will not be due to an unhealthy market, but rather simply the result of a lack of supply of quality space until more space is delivered to the market via new construction or renovations.”

The best performing submarkets in the first half of 2018 based on occupancy growth were Oceanside (+56,000 sf), Carlsbad (+16,000 sf) and La Mesa/Lemon Grove (+15,000 sf). Chad Iafrate, CCIM, Senior Director, said, “Tenants contributing to the positive absorption across these submarkets highlight established retail trends; expansion of specialty grocers as well as food and beverage/event spaces.”

He elaborated, “To that note, one of the largest move-ins during the first half of 2018 was Punch Bowl Social, a 20,500-sf “eatertainment” business featuring a bar, restaurant, arcade, bowling alley, bocce court, and a karaoke lounge and billiard lounge. Representing the chain’s 12th venue, Punch Bowl Social’s San Diego location is located in the former Coliseum Athletic Club which once served as a boxing arena during the 1920s and 30s. While over two years in development, the food & beverage venue opened in June 2018 and further contributes to the redevelopment of the East Village area of downtown.”

Phil Lyons, Managing Director of Cushman & Wakefield San Diego, said, “Tenant demand continues to be driven by national and regional chains, most of which place the highest importance on the best-in-class centers within each trade area, fueling strong demand for Class A space. In fact, many chains from trend-setting areas like Los Angeles and New York are eyeing San Diego for their next expansion. Because of strong demand for quality space, landlords of Class A centers are in the power position but tenants can still negotiate relative bargains for space at many Class B and C projects.”

The countywide average asking rent for retail space was $2.32 per square foot (psf) per month on a triple net basis as of midyear 2018, a 4% increase from year-end 2017. Mr. Lyons said, “Both coastal and high-income suburban locations remain popular and command premium rents for their locations. Del Mar, with a 2.4% vacancy rate, remains the premier target trade area for expanding retailers, keeping rents among the highest in the county, averaging $4.69 per square foot (psf) per month on a triple net basis, largely due to the rents achieved at the prestigious Del Mar Highlands shopping center. Among other high-cost coastal submarkets are Solana Beach ($3.50 psf) and Encinitas ($3.19 psf).”

With just over 1.0 msf currently under construction, San Diego has not seen this level of development volume in 12 years (1.4 msf under construction in 2006). Drivers of construction include demand for mixed-use retail experiences, urban development and redevelopment, as well as the expansion of trophy projects and outparcel/pad development in existing shopping centers.  Ms. Campion pointed out, “Of the 29 projects currently under construction, the majority are located in urban locations. In fact, 18 retail projects are currently under construction in Downtown or Uptown, primarily on the ground floor of multi-family or hospitality buildings.”

Looking forward, Mr. Lyons said, “It is worth noting that each and every second-half (2H) period over the last seven years (since 2011) has seen robust retail occupancy growth, and we expect 2018 to maintain this streak given demand in San Diego remains strong.

“With anticipated deliveries of high quality, experiential retail in mixed-use developments over the next two years, San Diego’s large Millennial population—known for valuing experiences—will be a heavy driver, demanding innovative and Class A retailers. The gap between Class A shopping centers and the rest will widen as creative concepts are drawn to anchor vacancies at the best and most well-located centers.”

  • CLICK HERE to access H1 2018 San Diego Retail MarketBeat Report.
  • CLICK HERE to access H1 2018 San Diego Retail Snapshot with Historical Data.

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