Downtown San Diego's retail market is on fire with nearly 1.13 million square feet of space planned or already under construction -- 64 percent of which is in the East Village near Petco Park.
"There is no question that the opening of Petco Park and the hundreds of new residential units and hotel rooms in the 26 block area surrounding it have sparked a flurry of retail development to meet growing demand for restaurants, shops and services," said Bill Shrader, senior vice president of Burnham Urban Retail Group. "Retail throughout downtown overall is very strong as the area continues to evolve into a synergistic live, work and play community."
Burnham wrote that the retail inventory downtown grew by 298,041 square feet during the 12-month period from June 30, 2004, to June 30, 2005. Of this, 191,923 square feet -- or 64.4 percent -- is located in East Village. The balance is fairly evenly distributed among Little Italy, the Gaslamp Quarter and central core neighborhoods.
The downtown retail vacancy rate increased slightly during the same 12-month period, from 7.1 percent to 7.8 percent, due in part to new inventory that has not yet been occupied, as well as to total negative net absorption of 52,142 square feet.
"This negative activity is attributed to the fact that existing retail tenants in older product that is being redeveloped have to vacate," said Shrader. "All of this negative absorption was recorded in markets like East Village, and the Central Core where most of the new building activity is concentrated."
East Village, which has 708,341 square feet either under way or planned, also recorded 53,777 square feet of negative absorption.
"We may see the downtown vacancy rate increase temporarily as this space comes on line over the next 12 to 24 months," said Shrader. "However, pre-leasing activity in the downtown market is very strong, and the market is positioned for long-term supply and demand balance."
Corinna Gattasso, senior associate of Burnham, also doesn't see this as a problem.
"As this new space is completed, we will see a wave of hip new retailers and restaurants like The Palm Restaurant and Design With Reach enter the market, along with more traditional neighborhood tenants such as Marble Slab Creamery, Subway and Blimpie."
The nearly 1.13 million square feet of retail under way downtown is up 8.65 percent from slightly more than 1.04 million in the middle of last year.
Most of downtown's new retail development is storefront within mid- and high-rise condominium and apartment projects.
"With very few exceptions, nearly all of the new retail in downtown is integrated into residential projects," said Gattasso. "East Village alone has more than 24 residential projects that are under construction or planned and include a retail component. Little Italy has six new planned condo projects that include retail ranging from as small as 2,000 square feet to as much as 20,000 square feet."
The negative absorption notwithstanding, Burnham says tenant demand continues to be strong, with companies like Starbucks (Nasdaq: SBUX) and 7-Eleven (NYSE: SE) leading the way.
"They are uniquely able to open multiple locations within proximity to each other," said Shrader. "Supermarket operators believe there is room for one or two more supermarkets and specialty markets in downtown to meet the needs of the growing residential population. Albertson's (NYSE: ABS) will soon join Ralph's supermarket with a 42,000-square-foot location in East Village. Financial institutions and major drugstore operators are also scouting for sites, including Rite Aid (NYSE: RAD), which recently signed a lease in Little Italy."
In Gaslamp Quarter, which has become the home of upscale and expensive restaurants, 25,000 square feet of new retail space is under construction and another 40,000 square feet of new retail space is planned -- all of which is located in three new hotels: The Renaissance, Residence Inn and Hard Rock Hotel.
"Gaslamp is evolving into a major retail destination similar to the Third Street Promenade (in Santa Monica), Old Town Pasadena and State Street in Santa Barbara," said Shrader. "The area -- particularly along Fifth Avenue -- is seeing an influx of trend-setting retailers like Quiksilver, (NYSE: ZQK) Puma, Hilo Hattie, Adidas and Borders Books & Music."
Major retail development downtown includes 200,000 square feet of space planned as part of the proposed new Ballpark Village mixed-use project in East Village, and 120,000 square feet of new shop space in the Seaport Village expansion.
"The rest of the space is dedicated to smaller, street-level retailers who see tremendous demand by residents who want to walk to do their shopping -- be it clothing, artwork, groceries or sundries," said Gattasso. "We now have seven very viable 'neighborhoods' downtown, each of which has its own identifying ambience but that interacts and promotes synergy with the others."
Neighborhood by neighborhood highlights of the downtown retail market are as follows: