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Growing San Diego retail market pauses in third quarter

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With an economy that has consistently outpaced the state and the nation, San Diego's retail market has been strong. But southern Riverside County may soon be giving San Diego a run for its money.

A CB Richard Ellis report says Murrieta alone had 148,000 square feet of positive net retail absorption.

The region including Temecula and all of San Diego County had just 142,500 square feet of net absorption in the third quarter, and 611,496 square feet year to date.

With 51,192 square feet of positive absorption, Oceanside was the best performing retail submarket in San Diego County during the third quarter.

Many of the submarkets had negative net absorption.

The Rancho Penasquitos/Poway submarket returned 31,267 square feet.

The city of Escondido's downtown, which competes with Westfield's North County Fair, posted 29,532 square feet of negative absorption.

The Chula Vista/Bonita submarket had 26,641 square feet of negative absorption.

While negative absorption was the norm here and in numerous other markets, none of the submarkets had a retail vacancy higher than 3.7 percent. Santee, which had the 3.7 percent vacancy figure, is a submarket with aging space that must compete with relatively new projects.

This past quarter may have been a hiccup, but CBRE notes that diverse industries like high technology, biotech and the services sector mean San Diego has the high-paying jobs to fuel the retail demand that will take up the space.

"In fact, San Diego has not experienced unemployment rates above 5 percent since 1995," CBRE writes. "This trend has been the norm over the past few years as the countywide vacancy rate has hovered below 4 percent since the fourth quarter of 2002."

During the third quarter, the market tightened a bit as the vacancy rate crept downward 0.1 percent to 2.1 percent."

The report said even with a lackluster quarter, vacancy levels continued to be low as developers scrambled for new places to build in an increasingly built-out universe.

Construction remained steady at about 1.7 million square feet during the third quarter, and the average retail lease rate also climbed from $1.98 to $2 per square foot.

The Del Mar/Solana Beach/Rancho Santa Fe submarket had the highest asking lease rates at $4.63 per square foot, followed by the Mission Valley submarket at $3.25 and the Cardiff/Encinitas/Leucadia submarket at $2.92 per square foot.

Looking ahead, the CBRE retail report says despite a ho-hum performance in the third quarter, the retail market continues to be very healthy. "For the remainder of the year and into 2006, the retail market of San Diego is expected to be strong."

Although vacancy rates will likely increase, they should remain low and hover around 3 percent. Lease rates will either level off or will show slight increases across the county (including southern Riverside) while construction activity will remain steady as new projects are delivered to the market, especially to outlying submarkets such as Temecula, Murrieta and Chula Vista."

Well-located shopping centers continue to draw major investors. In July, the 127,148-square-foot Clairemont Village on Clairemont Drive in Clairemont Mesa sold for $29 million.

Also in July, The Island@Carlsbad, an approximately 50,000-square-foot shopping center at on Van Allen Way in Carlsbad sold for $17.6 million.

Related Article:

San Diego retail real estate market continues to expand (Aug. 30, 2005)

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