The retail market in downtown San Diego -- which took a hit on ground floor spaces during the recession -- has rebounded well, according to a Cushman & Wakefield report.
While the 6.4 percent rate is higher than many other submarkets, the last time the downtown rate was this low was in 2003.
The report, compiled by Bill Shrader, Cushman & Wakefield senior director, tallied 182,221 square feet of absorption in 2013, a 42 percent increase from 2012.
Leasing activity and retail absorption were positive for the third consecutive year in downtown.
Nearly 225,000 square feet of retail and street-level lease transactions were signed in 2013, the majority to restaurants, service-oriented retail and creative office users.
As of year-end 2013, there was 329,359 square feet of vacant ground floor commercial space downtown, within a total inventory of 5 million square feet.
“Activity is strong, and while the urban market has been dominated by independent entrepreneurial operators -- primarily restaurants -- we are seeing renewed interest among multi-unit soft goods retailers as well,” said Shrader.
After more than a decade of planning, The Headquarters -- located at the former police headquarters building adjacent to Seaport Village -- opened in the Marina District last fall with tenants including The Cheesecake Factory, Eddie V’s, Seasons 52, Pizzeria Mozza and Puesto.
Following the craft beer trend in San Diego, Ballast Point opened in Little Italy and Stone Brewing Co. opened in the Columbia District, and signed a lease for a new Petco Park location.
Redevelopment and renovation of Horton Plaza attracted new tenants, such as Jimbo’s Naturally, the health-oriented market.
“2014 will be the year of reinvention, where many existing restaurants will change hands,” the report stated. "On the heels of El Vitral’s transition to South Paw and Donovan’s Prime Seafood will soon become Union Kitchen.
"Over the next year, The Palm will convert to Water Grill, Rock Bottom will transition to Tin Roof, Fred’s Mexican Café will transition to Don Chido and Jimmy Love’s will update its space with new partners," the report added. "We are likely to see other conversions this year, bringing the market to current trends in the food and beverage industry."
David Maxwell, a C&W Urban Property Group associate, said, “While there is still residual economic uncertainty among peripheral retail locations, we are seeing significant improvement on prime high street locations such as Gaslamp on Fifth Avenue and India Street in Little Italy.”
Although the average rental rate for downtown overall declined slightly in 2013, the report added those neighborhoods with vacancy rates below 5 percent are seeing rental rate growth driven by the competition for prime locations.
Gaslamp Quarter rents for retail shops have risen to $6 to $8 per square foot for prime Fifth Avenue space, while rents in peripheral downtown locations are averaging $1.50 to $2.25 per square foot.
The report said demand for retail space on Fifth Avenue is strong, and with an absorption of the former Borders Building, the vacancy rate has dropped to 3.8 percent in the Gaslamp Quarter. Retail tenants in that building include the Fogo de Chao restaurant and Le Parfait.
Two of the eight downtown San Diego neighborhoods reported a vacancy rate under the Gaslamp’s rate of 3.8 percent.
The report said the Columbia District's vacancy rate of 1.8 percent is due to its limited retail inventory in a prime residential location and proximity to Class-A office buildings.
Little Italy came in second with a vacancy rate of 2.1 percent. Juniper and Ivy recently opened in Little Italy and Consortium Holdings’ Ironside Oyster and Bird Rock Coffee Roasters are two anticipated openings in 2014.
The C&W report showed that East Village made improvement with 34,523 square feet of absorption, bringing the vacancy down to 8.5 percent. This marks the first time the vacancy rate has been under 10 percent since 2002.
Multiple projects are expected to deliver in 2014, adding 20,000 square feet of retail inventory.
“The downtown market will continue to be a top tourist and entertainment destination,” Maxwell said, “but the biggest growth will continue to come from the residential and daytime population demand.”
"The Ballpark neighborhood specifically is anticipated to greatly benefit from the new Sempra Energy Headquarters building at Seventh and Island," he said.
The report stated the retail supply pipeline is expected to stay at historic lows, and the residential sector will comprise a large portion of new development.
With the diminishing supply of street-level retail, the report stated it will be difficult to maintain the current pace of leasing activity in 2014.
"Vacancy will not drop at the same rate as it did in 2013 but an improvement of a single basis point is expected," the report continued, adding that it may take another year for rental rates to rise significantly throughout downtown.
C&W reported the Gaslamp, Little Italy and Ballpark neighborhoods should charge higher rents due to the scarcity of available space.