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Retail market takes a breather

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The sagging economy continues to impact the national retail sector as consumer spending is down, energy prices are up, and the credit and debt markets are still feeling the effects from the subprime meltdown.

With a dubious economy and a lack of land, retail construction in San Diego County has almost ground to a halt, according to a CB Richard Ellis report.

In 2007, 688,000 square feet of new retail space was developed in San Diego County. So far through the first half of 2008, only 50,000 square feet of new retail construction has been completed in San Diego County, with an additional 196,000 square feet of retail space delivered in Murrieta.

With approximately 60,000 square feet of retail space under construction in San Marcos, 71,500 square feet in development in Santee and approximately 150,000 square feet being built in Chula Vista, less than 300,000 square feet of retail space is currently in development countywide.

Retail net absorption during the second quarter totaled approximately negative 8,500 square feet.

Twelve of the 33 submarkets posted positive net absorption gains during the second quarter, led by San Marcos with 51,000 square feet, Carlsbad/La Costa with 18,000 square feet and Cardiff/Encinitas/Leucadia with 17,000 square feet.

New construction projects completed during the quarter totaled approximately 50,000 square feet, all of which occurred in San Marcos within the San Elijo Hills Town Center.

Additionally, 651,000 square feet of new developments are under construction in the region including southwest Riverside County -- the bulk of which occurs in Murrieta. Notable projects under construction include Canyon Plaza (235,000 square feet) and Murrieta Plaza (165,000 square feet), both in Murrieta.

The dearth of new retail space coming online in 2008 will fuel competition for existing empty space, keeping the San Diego County vacancy rate around or below 3 percent -- even as consumers are cutting back and retailers are closing locations all over the country.

This was the third straight quarter with a vacancy rate at or higher than 3 percent (the current figure) -- following 17 straight quarters below that number.

The 3 percent retail vacancy rate has risen 0.6 percentage points since the first quarter of last year, when the overall rate was 2.4 percent. Although the up-tick in vacancy from about 16 months ago shows retail demand has slowed, dramatic vacancy increases are not considered likely through 2008.

San Diego County's retail vacancy rate is still performing significantly better than most of the rest of the nation. According to research firm Reis, the national vacancy rate for retail centers during first quarter 2008 was 7.7 percent.

The weighted average asking lease rate for San Diego retail space increased during the second quarter to $2.29, a jump of 3 cents compared to last quarter's rate, and a 15 cent hike from the second quarter last year. Rent appreciation over the past 12 months is approximately 6.9 percent, compared to $2.14 at the end of the second quarter 2007.

The submarket with the highest asking rate was Mission Valley at $4.00, followed by Del Mar/Solana Beach/Rancho Santa Fe at $3.39 and La Jolla at $3.25.

According to Mike Moser, CBRE senior vice president, the San Diego retail leasing market is maintaining a healthy balance.

"New retail space in pristine projects like Liberty Station will always be in high demand, and retailers will flock to those locations first," Moser said. "Through the current economic dip, space in smaller retail centers may stay vacant a little longer before a tenant signs the lease."

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