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Vigorous retail real estate market drives new construction

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A robust San Diego County retail real estate market outperformed the nation in the second quarter with active sales, low vacancies, rising rents and new construction, according to a local report.

"Given continued positive economic indicators, there are no signs of slowing," said Pete Bethea, Burnham Real Estate Services senior vice president. "San Diego's diversified and stable economy continues to fuel job and population growth -- the key ingredients that support a thriving retail real estate market."

Unemployment of just 3.8 percent as of May 2004, and recently monthly job gains are putting San Diego on track to reach projected annual average growth of 25,200. San Diego County's population continues to grow, surpassing 3 million people in 2003 to become the nation's 17th most populated metropolitan area, said a Burnham report.

"These strong dynamics contributed to more than 1.8 million square feet of retail space that was absorbed during the first half of 2004, almost half of which (809,246 square feet) occurred during the second quarter," said Bethea. "The completion of several new shopping centers and freestanding stores drove most of this activity."

Existing (often unanchored) centers posted a net absorption loss of 173,713 square feet -- nearly erasing their net gain of 225,316 square feet during first quarter.

"As a result, countywide vacancy increased slightly from 1.7 percent to 2.2 percent -- although this still is the county's lowest retail vacancy rate in more than a decade," reports Bethea. "Much of this negative absorption is due to the recycling of a few junior anchor spaces and are expected to quickly absorb."

Retail vacancy is highest in the unanchored strip centers at 3.7 percent, followed by community centers at 2.2 percent, and neighborhood centers at an even lower 1.8 percent.

The region's expanding economy continues to drive new retail construction and this, in turn, is promoting healthy net absorption throughout the county.

Leading the region's activity is the North County/Hwy 78 Corridor communities of Carlsbad, Oceanside and San Marcos -- which combined had 918,150 square feet of positive net absorption.

Next in line is the Interstate-15 Corridor with 345,084 square feet net absorption, followed by Central Suburban (199,645 square feet), East County (190,487 square feet) and South Bay (204,591 square feet).

Central (Downtown) and North City both recorded negative absorption, albeit small -- at minus 8,201 square feet and minus 9,369 square feet, respectively.

"These two markets account for just 8 percent of the county's entire shopping center inventory, so impact on countywide vacancy was minimal," said Bill Shrader, a Burnham vice president. "Moreover, the downtown San Diego retail market is very strong and healthy, supported by a fast-growing residential base and new office development. However, because urban retail is not captured in the traditional shopping center survey, its positive performance is not reflected in net absorption numbers."

Year-to-date retail construction completed totals of 1.8 million square feet, says the Burnham report, with another 1.3 million square feet under way.

Major retailers have been particularly active.

Kohl's finished four stores totaling approximately 260,000 square feet in Chula Vista, Poway, Santee and San Marcos.

Wal-Mart, in addition to the 160,000-square-foot El Cajon store in Westfield's Parkway Plaza, completed three more outlets totaling 426,257 square feet in Chula Vista, Kearny Mesa and La Mesa's Grossmont Center.

In Poway, Costco is building a 149,000-square-foot store and Home Depot a 134,000-square-foot outlet, both in the South Poway Business Park.

On the investment side, San Diego remains a very attractive market.

Buyers acquired 17 shopping centers valued at $5 million or more so far this year for an investment total of more than $230 million.

This compares to 36 centers sold in all of 2003 for $693 million.

"The going cap rate for Class A retail properties in San Diego is averaging below 7 percent, and the median selling price is now $196 per square foot," Bethea said.

"The highest priced shopping center was the 90,000-square-foot Torrey Highlands Village Center which sold for $37 million in the first half of 2004.

Other first-half sales of properties over 100,000 square feet included:

  • The 100,000-square-foot Courtyard at Carmel Mountain Ranch for $27.7 million.
  • The 110,800-square-foot El Camino Promenade in Encinitas for $24.57 million.
  • The 100,551-square-foot Edwards Cinema 18 San Marcos that sold for $20 million.
  • The 167,000-square-foot Mission Square Shopping Center in Oceanside for $15 million. While retail sales have apparently been strong enough here to justify new projects and attract investors into the San Diego marketplace in recent months, the story appears to be a very different one in the rest of the country.

    "Overall, this doesn't look so good," said Ken Perkins, president and research analyst at RetailMetrics LLC, a Boston-based independent research company, in an Associated Press report. "There are a number of different factors that are coming together to dampen consumer spending."

    Retailers found low-to-middle-income shoppers were more frugal in response to higher gas prices and grocery bills. Americans are also worried about their jobs.

    On Tuesday, the Conference Board reported a larger-than-expected decline in consumer confidence, and attributed the slide to concerns about job prospects.

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