COMMENTARY | COLUMNISTS | ALAN NEVIN

San Diego’s commercial market healing

Things are going rather well for San Diego County. Last year, California added 250,000 people and San Diego accounted for 28,000, or 11 percent of that gain. Better yet, we were the second-highest county in the state in terms of population gain, second only to Los Angeles.

From a jobs standpoint, San Diego County is also in the money, placing third in the state with a gain of 31,400 year-over-year, with Orange County placing 35,200 and Los Angeles in the winner’s box with 89,400 new jobs. On a percentage basis, our county tied for second place.

The increases in population and jobs auger well for the commercial market and, of course, the housing market.

The winner by far in the tri-part race of retail, industrial and office is the retail sector. It helps that there has been minimal construction of new retail space in the past decade, but considering the disaster years of 2008-09, the retail industry is in great shape.

After all, we lost a half-dozen big box chains in short order (Borders, Circuit City, Mervyn’s, for example), yet have filled those big empty boxes with stronger tenants like Kohl’s, Nordstrom’s Rack, 24-Hour Fitness and Best Buy.

The number of new retail names in the past two years is somewhat startling. The county’s 11 regional centers have added myriad new names, or at least new to me.

I’m not much of a shopper, but walking through the renovated Westfield UTC is an eye-opener, especially the addition of restaurants such as the Corner Bakery Café, Tender Greens and Seasons 52. There are 33 places to eat and drink at that center. And then there’s the ArcLight Cinema, a true delight in moviegoing.

The regional shopping centers have less than a 4 percent vacancy rate with the power and anchored centers in the 4 to 5 percent range. The only softness is in the strip centers with a 10 to 12 percent vacancy rate, but they make up only 5 percent of the total space in the county.

It’s nice that San Diegans are still big supporters of shopping center retailing, even with the website inroads. Remember, a substantial percent of the retail space is occupied by service providers. I don’t envision buying a haircut on a website.

The industrial/R&D space market is definitely improving. In 2012, more than 3 million square feet of space were absorbed, the best in six or seven years. That drove down the vacancy rate countywide to less than 10 percent, gradually coming down from 13 percent four years ago.

As might be expected, the closer-in locations have the lowest vacancy rates (think Kearny Mesa), with much higher vacancy rates in the distant suburbs.

Rents have cascaded modestly in industrial properties —down 15 percent from their peak — but R&D space rents have plummeted by 25 percent in the past five years.

With construction at a near standstill, vacancy rates should continue to decline steadily and that should put a stop to declining rent rates. Good news lies ahead.

Office space continues to be the weak link in the commercial space market. With a countywide vacancy rate in the 16 to 17 percent range, all classes of office space are hurting. Apparently, the major wound is in the B class, where vacancy rates are above 20 percent. The weakness is throughout the county, though there are a few bright spots. UTC, Sorrento Mesa and Torrey Pines areas have vacancy rates under 10 percent.

We are somewhat pessimistic about filling up the space because there are 1.25 million square feet of space under construction, most of which will result in currently leased space being vacated. Perhaps even more discouraging is the continual reduction in space per person.

In the good old days, an allocation of 400 square feet per person was the standard. Now it is less than 200 square feet and falling. Therefore, filling up existing space is becoming more of an uphill battle. Since the beginning of the deluge in 2008, rent rates have declined about 20 percent.

Despite the negativism in this discussion of office space, we do recognize that increasing population and employment generally have a positive effect on occupancy rates. That said, it’s looking to be a long road to recovery for the office market. Maybe some of the space will be converted to residential condominiums. There is certainly a demand for that product.

Overall, our commercial market is in fairly good shape and a few more years of job gains on the order of those experienced in the past year should lead to improvements in the office and industrial market and continued euphoria in the retail sector.

Nevin is a principal with The London Group Realty Advisors. He can be reached at alan.nevin@sddt.com.

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