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With the holiday season now in full swing, retailers are anxious to see what this year's season will bring them.

Based upon the returns so far, many are predicting a positive retail holiday season, with holiday spending at or above the levels of last year.

"On a national basis, consumers are armed with more cash to spend due to falling gas prices, and they are expected to spend generously over this holiday season," said Joe Balla, president of Lee & Associates San Diego and a member of the Commercial Realtors Association San Diego (CRASD), a real estate association. "Gas prices and consumer shopping go hand in hand, and since August, when prices at the pump were at their highest this year, they have fallen 82 cents per gallon. This adjustment will bode well this Christmas season as shoppers reapportion these dollars toward holiday purchases."

For the real estate market, a healthy holiday retail season translates into a strong real estate market, Balla said, adding that the demand for retail space will likely increase as a result.

"There will continue to be increased competition for quality retail locations by expanding tenants," he said. "Mom and pop retailers will be squeezed as national, regional and franchise retail and restaurant chains gobble up opportunities for high traffic locations, which are becoming harder to identify."

According to many reports, San Diego's retail market is already experiencing low vacancy rates, a high demand for retail space and increasing rental rates, all trends that are expected to continue, Balla said.

A recent report by Grubb & Ellis|BRE Commercial stated that "San Diego continues to be a desirable location for all players in retail real estate, and the overall statistics for the region reflect signs of positive force."

Tony Villasenor, a broker in the retail properties division of Grubb & Ellis|BRE and a board member of CRASD, said the retail market in San Diego "continues to be actively pursued by both investors seeking financial opportunity and by tenants looking for space."

"There is a large retail portfolio being sold that is being aggressively pursued by a group of investors," Villasenor continued. "That tells me that the retail sector is very hot."

According to the latest Grubb & Ellis|BRE Commercial retail report, nearly 80 percent of the 29 submarkets in San Diego recorded retail vacancy rates below 3 percent, compared to 67 percent of all submarkets in the second half of 2005.

"The countywide vacancy rate decreased 1.9 percent, or 1.2 million square feet, in the first half of 2006, a 10 percent decrease from year-end 2005," said Villasenor.

Jay Diskin, SIOR, CCIM, president and CEO of GVA IPC and a fellow member of CRASD, agrees that vacancy rates are decreasing, and as a result, rental rates are increasing.

"We are seeing that retail spaces are far and few between. It is very hard right now to find retail space," Diskin said.

Much of the limited supply is due to the fact that there is a minimal amount of available land left in San Diego for retail development, he said.

According to San Diego Mayor Jerry Sanders, who recently spoke at the University of San Diego's Burnham-Moores Center for Real Estate and the Urban Land Institute San Diego/Tijuana District Council 2007 Real Estate Trends conference, only 4 percent of San Diego's land is available for development.

"The market for retail has gotten tighter and tighter," Diskin said. "We are running out of land in San Diego that is appropriate for retail. Retail needs to be around housing and main thoroughfares. So what people are doing is they are repositioning property and changing the use of a building so that it is usable for retail."

Barbara Kreis, a senior vice president with Sperry Van Ness and a board member of CRASD, said many older retail spaces are undergoing improvements to remain competitive in the tight retail market.

"Older, tired properties will need to be updated to achieve the benefits of this market, remain competitive and generate top dollars from buyers," she said.

As properties get older and retail space is harder to find, developers will begin looking toward more mixed-used projects, Balla said.

"Traditional retail will continue to adapt to the ever-changing consumer market. Interestingly enough, the oldest baby boomers are turning 60 this year. This generation represents over 26 percent of the country's population and over $2.1 trillion in annual buying power, making them the dominant demographic retailers serve," Balla said.

"As this age group continues to mature," he continued, "they will demand more accessible shopping opportunities, and retail developers will be listening. This will lead to more and more mixed-use types of developments both in re-design of existing shopping centers as well as new developments. Shopping center designs will change as developers create easy-to-navigate vertical layouts and higher-end finishes.

"We have noticed an increased appearance of lifestyle types or retail centers that serve as gathering places where shoppers can linger, meet friends, shop and enjoy a meal at their favorite restaurant," Balla said. "We will see more of these planned for 2007 and beyond as developers meet the needs of the demographic markets they are serving."

Like every aspect of the real estate market, location is extremely important in the retail sector.

"Though there is considerable interest from big box tenants and chain tenants alike, savvy investors will keep their focus on location, location, location," Kreis said.

With so much interest from tenants and investors, the retail sector will likely remain positive in the coming year, she added.

"San Diego has been a bright light in the retail segment for the past few years and I think San Diego is certainly poised to remain a stable and viable retail market for 2007," Kreis said. "Especially when considering the basic fundamentals of the strength of the local economy, the steady population growth, the lack of available land for additional competitive product, the constrained supply of product and perhaps most importantly, the available product.

Villasenor agreed.

"San Diego has traditionally produced strong retail sales numbers for national and regional retailers and restaurants. This result is mainly due to our weather and solid demographics. Although we are seeing a definite slowdown in housing activity, San Diego shopping centers will continue to enjoy remarkable results as consumers see entrepreneur's new concepts in America's Finest City."

Kovach is senior account manager at Whitelaw Marketing, a full-service marketing communications firm.

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