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Office, industrial leasing improve; franchises driving retail

The county's office and industrial rental markets are stronger, while franchises are powering retail leasing.
Office vacancies

The overall countywide office vacancy is projected to decline from an estimated 18 percent as of the end of last year to 17.4 percent by the end of 2013, According to a Cassidy Turley forecast.

Cassidy Turley noted the figure is well above the 16.4 percent 10-year average.

The forecast was done in conjunction with the National University System Institute for Public Policy Research and San Diego State University's Corky McMillin Center for Real Estate.

The county is expected to absorb a net of 600,000 square feet of office space next year. It absorbed about 460,000 square feet through 2012's first three quarters by Cassidy Turley's accounts.

“In the short-term (2013), recovery will be more evident in prime Central County submarkets such as Del Mar Heights, Sorrento Mesa, UTC, Kearny Mesa and Mission Valley, while other submarkets such as a majority of the South County submarkets (including downtown San Diego) will remain in status quo throughout 2013,” Cassidy Turley wrote.

The report noted that downtown San Diego, which has approximately 2 million square feet of vacant space, continues to struggle.

The bottom line, the report said, is that it will be well into 2014 before a significant recovery is felt in the office submarket.
Industrial vacancies

Cassidy Turley didn't have industrial figures for the fourth quarter, but reported that the county posted net absorption of 1.9 million square feet through the third quarter of 2012 -- compared to the return of 1,087 square feet during the same period in 2011.

The report said tenants currently in the market for industrial space are looking for more than 4.7 million square feet countywide.

This in turn is divided into 2.6 million square feet in the North County, with the remaining 2.1 million square feet in the southern and central parts of the county.

With 2.5 million square feet of vacant space, Otay Mesa could use some absorption. In this submarket in particular, minimal construction is seen as good news.

“A lack of new construction countywide will continue to play an important role in the San Diego industrial market recovery,” the report said, adding that in most submarkets “the demand for Class A assets with well-positioned quality tenants in place in high-traffic submarkets will continue to outpace supply."
Retail vacancies

The Cassidy Turley report noted the retail market has vulnerabilities – including that many people would rather shop with the click of a mouse than take the time to go to a bricks-and-mortar store.

The report stated while the “mom and pop” retailers have been particularly subject to competition from electronic retail, large, national franchises have capitalized both their online presence and ready access to capital.

The most successful franchise models, the report stated, are service-based franchises.

Massage Envy, grew quickly during the past two years and now has about 25 locations in San Diego County.

The hair salon industry has been busy, with SportClips signing 13 new leases in this region in 2012, and more on the way. Fenix Salon Suites is expecting growth here, as is the Supercuts franchise that opened three stores in the county last year, with four more on the way.

Another expanding service-type franchise is European Wax Center.

"Retail space is also being taken by service types that would traditionally find home in medical offices,” the report continued.

Pacific Dental Services opened three new locations in San Diego in 2012, and three more locations are planned for this year.

Medifast is also planning to expand in San Diego in 2013, as is The Joint, a chiropractic office.

Franchise restaurants such as Luna Grill, which started a few years ago with a single location in an Albertson's-anchored center near state Route 56 in Rancho Penasquitos, has added three new sites to the region in 2012, with plans to open three in the county in 2013.

Gourmet burger restaurants seem to be springing up everywhere, but new locations continued to be added locally by Smashburger, The Counter, Five Guys and Burger Lounge.

Pick Up Stix also opened two new locations in San Diego last year, and has another two planned for 2013, and Boneheads Grilled Fish & Piri Piri Chicken has plans to expand to San Diego with two new locations in 2013.

Discount store 99¢ Only opened one new store in San Diego in 2012 and is looking to add four more locations in the area this year.

In 2013, overall leasing activity level for centers of all sizes is expected to remain the same or improve slightly yet remain below the prerecession levels.

Net absorption for centers 50,000 square feet and larger is expected to be slightly weaker than in 2012, yet remain positive, the report stated.

“With no new deliveries scheduled for 2013, leasing should remain competitive, the report continued."This is especially true in well-positioned properties where demand is beginning to outpace supply and reduced rents will begin to creep back towards their pre-recessionary peak levels.” Among submarkets commanding the highest effective rents are Del Mar, La Jolla, Solana Beach and UTC, with rents ranging between $3.46 to $5.70 per month.

The countywide effective rent average in 2012 was $2.37, compared to $2.39 in 2011.

While there are still some potential pitfalls, Cassidy Turley likes what it sees for this year.

“Overall, 2013 is slated to lay the groundwork for the San Diego retail market to transition from the slow recovery seen since the last recession, including the financial crisis, to a more vibrant recovery in the coming years,” the report conclude.

Countywide direct retail vacancy is expected to decrease from 5 percent in 2012 to 4.8 percent in 2013 as the retail market continues to work its way through the recovery.

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