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Increased residential demand driving retail surge downtown

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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:

  • Inventory in the Marina District has not changed since last year, still holding steady at 400,494 square feet with 5.8 percent vacancy. Another 138,000 square feet of new space is under way or planned, most of which is in the Seaport Village expansion and the rest located in the Pinnacle, a new condominium tower.

  • Little Italy saw the addition of just 24,600 square feet of new retail space since June of 2004. Current inventory of 387,437 square feet reports vacancy of 5.6 percent, down from 7.1 percent a year ago. There are 56,500 square feet of new space under construction or planned in several new condominium projects.

  • The Horton Plaza District is the largest retail neighborhood downtown to date (though soon to be surpassed by East Village) with the Horton Plaza regional mall as its primary anchor. Inventory remains the same as a year ago, at 962,500 square feet, and just 18,567 square feet of this space is vacant for low 1.9 percent vacancy. There is no new space currently under construction or planned in this area, according to Burnham.

  • The Gaslamp Quarter saw its existing inventory grow by 21, 564 square feet to slightly more than 945,000 square feet -- currently ranking it as downtown's second largest retail market. Vacancy stands at a low 2.6 percent -- a number that should not increase substantially as 65,000 square feet of new space comes on line over the next six to 12 months (most of this new space is or will be pre-leased).

  • East Village will see its retail inventory grow to more than 1.3 million square feet in the next 12 to 24 months as 708,341 square feet of new space is added to current inventory of 657,834 square feet. The 122,654 square feet of empty space was formerly occupied and vacated in anticipation of new development.

  • Cortez Hill has 127,704 square feet of existing inventory with 8.9 percent vacancy. Another 9,500 square feet of space is planned in three residential projects: Hanover, Lofts on Fourth and ANKA.

  • The Columbia district saw its vacancy fall from 6.6 percent as of June 30, 2004, to 2.6 percent as of the end of June 2005. An additional 82,000 square feet of retail space is planned in three residential projects (Bosa-Dave's, Santa Fe-Austin and 2 America Plaza) and two office projects (1337 India and Broadway 655, downtown's first new office high-rise in over 13 years).

  • The Central Core has 621,397 square feet of existing inventory, with another 30,000 square feet of space under construction in Vantage Pointe, and 10,000 square feet planned at 11th & B and Pacific Pointe, both condominium projects.

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