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Retail construction in the county under constant pressure from demand

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San Diego County has a retail vacancy of just 2 percent, and even with 3.63 million square feet under construction, that figure is not expected to change dramatically.

CB Richard Ellis reported that tenant demand is strong for big box tenants. In addition, quick-serve outlets such as Quizno's, Panda Express and Starbucks (Nasdaq: SBUX) are continuing to aggressively expand here.

"As far as the data side it's the same story as always. The market is tight and most of the construction is happening in the outlying areas where all the housing is going," said Gary Baragona, CB Richard Ellis information manager.

The 3.63 million square feet of construction activity mostly centered around eastern Chula Vista with 955,000 square feet, including the 850,000-square-foot Otay Ranch Town Center opening this week, and the bedroom communities of Temecula and Murrieta in adjoining Riverside County, where San Diegans go searching for affordable housing.

Temecula posted 185,000 square feet of net absorption in the third quarter, Murrieta had a net 102,301 square feet, and eastern Chula Vista posted 112,293 square feet.

Other suburban construction includes: the 354,000 square-foot Grand Plaza shopping center under construction in San Marcos; and the 412,000-square-foot Village Walk Plaza and 236,000-square-foot Home Center Murrieta, which are both in Murrieta.

While lease rates have continued to climb in the wake of nearly insatiable demand, these may moderate somewhat over the next 12 to 18 months as new space becomes available. This may also give tenants a chance to find spaces where there has been little or none available.

Interest in new retail space has continued unabated; of the 459,000 square feet absorbed in the third quarter, 41 percent (190,000 square feet) was in just-completed centers.

Most of the submarkets such as Escondido, Spring Valley/Rancho San Diego/Lemon Grove and Carlsbad/La Costa experienced positive absorption; however, there were exceptions. The Mira Mesa/Scripps Ranch area vacated 13,556 square feet more than was leased, and the Clairemont/Kearny Mesa/Tierrasanta submarket experienced 12,044 square feet of negative absorption.

The weighted average asking lease rates for retail space increased from $2 in the third quarter of 2005 to $2.04 in the second quarter of 2006 to $2.11 in the third quarter of 2006.

The Del Mar/Solana Beach/Rancho Santa Fe submarket had the highest average rent at $3.98 during the third quarter. It was followed by the Downtown/Hillcrest/Old Town submarket at $3.50 and the coastal Cardiff/Encinitas/Leucadia submarket at $3.27.

The lowest average asking rate in the county during the third quarter was just $1.04 per square foot in the Sports Arena/Point Loma area. That submarket was followed by Ramona with a $1.27 and El Cajon with a $1.29 per square foot average.

All of the average vacancy rates in each of the submarkets were less than 6 percent. Vista had a 5.8 percent vacancy as the third quarter drew to a close, but with no construction under way, this space is expected to be absorbed quickly.

Oceanside had the second-highest average retail vacancy at 4.8 percent, but that rate is considered to be a very healthy figure in the industry. Like Vista, Oceanside didn't have any retail projects under construction as of the end of the third quarter, according to the CB report.

The submarket with any sizable amount of space that had the lowest vacancy was in Fallbrook with a 0.4 percent figure. That submarket with a 471,798-square-foot base also doesn't have any retail projects under construction.

Although a recent PricewaterhouseCoopers Urban Land Institute report indicated that the retail market will soften throughout the nation, the CB report strongly suggested San Diego County will buck this trend. The main reason cited is the strength of the employment here.

"San Diego continues to have one of the lowest unemployment rates in the country. At the end of August, the unemployment rate in San Diego County was 4.1 percent, down 0.2 points compared to the last quarter and 0.3 points compared to the same time last year," the report stated. "The area's unemployment rate remains below the national rate of 4.6 percent and California's rate of 4.9 percent."

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