San Diego Retail Market Thrives in 2017: Occupancy Rises for Sixth Straight Year, Vacancy Falls to 4.1%

2018-01-26T12:52:29+00:00 January 26th, 2018|In the News|

SAN DIEGO, Calif. – January 26, 2018 –  Cushman & Wakefield’s new 2H-2017 Retail market report revealed another thriving year in the retail sector, driven by continued declining vacancy and significant occupancy growth, particularly in the year’s second half. Fueled by continued strong economic conditions and favorable demographics, San Diego maintains its place as a premier market for current and expanding retailers.

The firm’s new report showed that overall retail vacancy in San Diego fell to a mark of 4.1% by the end of 2017, shedding 30 basis points (bps) from mid-year 2017 and 40 bps from a year ago. Current vacancy is now more than 300 bps below its peak rate of 7.2% recorded eight years ago at the end of recession. Meanwhile, occupancy grew by nearly 210,000 square feet (sf) across all center types in the second half of 2017, lifting annual net absorption to nearly 270,000 sf for year 2017.

“While 2017 marked just the second consecutive calendar year of declining vacancy (2015 had experienced a momentary uptick), it represented the sixth consecutive year of positive occupancy growth as this market has tallied nearly 1.9 million sf of net gains since the start of 2012,” said Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego. “San Diego’s retail market maintains steady occupancy driven by continued strong employment and overall economic growth.”

The best performing submarkets based on occupancy growth in 2H 2017 were Oceanside (+108,675 sf), Uptown/Hillcrest (+38,991 sf), Escondido (+35,484 sf), Del Mar (34,989 sf) and San Marcos (+30,740 sf). Ms. Campion noted, “Tenants contributing to the positive absorption across these submarkets highlight established retail trends: expansion of specialty retailers and discounters. In fact, due to San Diego’s reputation as a ‘City of Villages’—small, tightknit communities within the county—the largest move-in (nearly 40,000 sf) was a small-format Target Express located in the former Wang’s of North Park (a former JC Penney’s for nearly thirty years). While the store has not opened yet, the retailer has taken occupancy and plans to offer a ‘curated assortment’ of products tailored for the community and is working with several North Park planning groups to ‘ensure the spirit of [the] community is reflected throughout the store assortment and design’, according to Target.”

She continued, “Another large move-in was Oceanside Marketplace (21,000 sf), a community swap meet/consignment hall. This business also reflects the demand for specialty retailers. Ross Dress for Less took occupancy of approximately 28,000 sf in Chula Vista, not a surprising addition considering the immense demand for off-price retailers.”

Phil Lyons, Managing Director of Cushman & Wakefield San Diego, said, “Not much has changed with regard to tenant demand, as it remains at stable and healthy levels and continues to be led by national and regional chains, most of which place the highest importance on the best-in-class centers within each trade area, fueling strong demand for Class A space.”

He added, “Both coastal and high-income suburban locations remain popular and command premium rents for their locations. Del Mar, with a 2.7% vacancy rate, remains the premier target for expanding retailers, keeping rents among the highest in the county, averaging $5.00 psf triple net per month due, in large part, to the availability at the prestigious Del Mar Highlands shopping center.”

As market supply remains constricted, San Diego has several notable new projects that seek to benefit the region’s retail marketplace in the near future. This construction remains driven by urban development and redevelopment, as well as the expansion of trophy projects in the best locations and outparcel/pad development in existing shopping centers. However, many projects that were expected to be completed in 2017, were pushed to the first half of 2018.  As a result, just 41,000 sf was officially delivered in 2017.

“With nearly 900,000 sf currently under construction at this time, San Diego has not seen this level of development volume in over a decade (1.4 msf under construction in 2006),” said Chad Iafrate, Senior Director of Cushman & Wakefield San Diego. “Drivers of construction include demand for mixed-use retail experiences, urban development and redevelopment, as well as the expansion of trophy projects and outparcel/pad development in existing shopping centers.”

The majority of projects in-development are located in urban locations. There are a total of 18 retail projects currently underway in Downtown, mostly on the ground floor of multi-family or hospitality buildings. Notably, Park 12, located in Downtown, is a mixed-use development adjacent to Petco Park. Set to be delivered in 2018, it will include 713 residential units and a 12,000-sf open air plaza. While located in a suburban submarket, the Millenia development in Chula Vista with 131,000 sf of retail under construction, strives to mimic urban development with walkable promenades, parks, services, shops and restaurants. It is billed as a ‘pedestrian paradise’.

Also on the suburban front, Kilroy’s One Paseo, a 23.6-acre mixed-use environment in Del Mar, will include retail, office and residential, totaling approximately 1.1 msf. The first phase includes 95,000 sf of retail and the initial segment of apartments. Retail occupancy is scheduled for the 2018 holiday season. Meanwhile, Watermark is another massive development happening in the Mira Mesa/Miramar submarket. .Additionally, the 40-year-old Westfield UTC has delivered on its second phase of a two-year, $600 million ‘resort-inspired transformation’. This expansion, which increases the total project size by 30%, features an additional 90 new shops and chef-driven restaurants (251,000 sf), an 18,000-sf indoor/outdoor event space. A new 149,000-sf Nordstrom opened in October 2017 to much fanfare, along with new restaurants and retailers.”

Looking ahead, Mr. Iafrate forecasted, “Construction deliveries will sharply increase throughout 2018 and 2019.  While 29% of space that is under construction is already currently pre-leased to tenants, there will certainly be some space delivered vacant likely leading to a momentary spike in vacancy. However, strong demand for space in San Diego will also continue during this time. With anticipated deliveries of high quality, experiential retail in mixed-use developments over the next two years, San Diego’s large Millennial population—known for valuing experiences—will be a heavy driver, demanding  innovative and class A retailers.”

 

CLICK HERE to access the 2H 2017 San Diego Retail MarketBeat Report.

CLICK HERE to access the 2H 2017 San Diego Retail Snapshot with historical data.

 

About Cushman & Wakefield

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