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San Diego Retail Rental Rates Hit a High

Carrie Rossenfeld Retail

According to CBRE’s research, the San Diego retail market had the highest asking rate on record in Q2 2018. After a steep decline in Q1, the average asking rate increased significantly in Q2, up $0.13 to $2.39 triple net (NNN), which is the highest rate on record.

Leasing activity for the market reached 645,341 square feet, up 14.6 percent from Q1, driving the availability rate down 20 basis points (bps) to 7 percent. Several large leases were from new tenants replacing previous tenants, not vacant spaces, so they had no positive impact on absorption, which was negative for the second straight quarter, CBRE reports.

Joe Yetter, first VP of CBRE in San Diego, says, “Tenants continue to pursue higher-grade properties, which demand higher asking rates that are pushing average rental rates up. We are seeing asking rates for quality class-A shopping centers at an all-time high.”

Despite higher asking lease rates, CBRE reports that in Q2, net absorption remained negative at -83,225 square feet, bringing year-to-date net absorption to -97,327 square feet There were also a few large vacancies this quarter that came to market, one being a former Sears in Carmel Mountain, which helped drive the vacancy rate up 10 bps to 4.7 percent.

Direct availability is at a post-recession low, and asking rates can swing dramatically from quarter to quarter with only a small set of properties coming online or offline, CBRE reports. The average asking lease rate increased significantly, up $0.13 (+5.8 percent) quarter over quarter to $2.39 NNN. Strip-center rates increased significantly, up $0.14 (+7.5percent) to $2.02 NNN. This can be attributed to high-priced availabilities coming online, such as at The La Jolla Marketplace and Otay Crossroads. Neighborhood centers slightly increased $0.08 (+4.0 percent) to $2.10 NNN, due to a large (43,794-square-foot) relatively high-priced availability coming online at The District at Eastlake. Downtown rates once again remained the highest at $2.92 NNN.

The firm also reports that, despite the leasing momentum, total vacancy rates increased 10 bps quarter over quarter to 4.7 percent. This activity drove the total availability down to 7 percent, which is 20 bps lower than last quarter and 100 basis points lower than last year. Vacancy increased the most in Central San Diego, yet remained incredibly tight, where the total vacancy rate was 3.6 percent in Q2, up 60 bps quarter over quarter. This is likely due to the 107,259-square-foot vacancy coming online at a power center in Carmel Mountain.

The Square at Bressi Ranch broke ground this quarter, with 90,000 square feet to deliver in Q4 of this year. There were not any new construction deliveries, says CBRE. The neighborhood center Millenia Town Center remains set to open in 2018 in Chula Vista and will consist of over 100,000 square feet of retail space. This is part of a larger national trend of discount and off-price retailers expanding their presence, especially in lower-income areas. The mixed-use neighborhood center One Paseo remains set to deliver in 2018 and will consist of 280,000 square feet of office space and upscale residential units.

Retailers are finding new ways to do more with fewer people by embracing e-commerce and utilizing omnichannel retail strategies that mesh online platforms with in-person experiences, according to CBRE. There has been plenty of buzz about e-commerce disruption of brick-and-mortar, but savvy retailers are recognizing the opportunities of mixing these platforms. Omnichannel allows retailers to focus more space and personnel on the in-store experience by cutting down on inventory and leveraging e-commerce distribution. Previously exclusive e-commerce companies have started opening brick-and-mortar locations or partnering for store-in-store to access the benefits of omnichannel.

In addition, CBRE reports that labor-market figures were generally positive for San Diego in Q2, with 32,500 jobs (+2.2 percent) added year over year. The unemployment rate fell to an 18-year low of 2.9 percent. Food-service employers had 100 fewer employees year over year, while traditional retailers added 800 jobs.

Stagnant retail job growth is more a sign of employers adapting to technological change, tight labor market conditions, and wage pressures than struggling sales. According to CBRE Econometric Advisors, retail sales grew by an estimated 3.8 percent year over year in Q2.

In other areas of SoCal, CBRE reports that Orange County has long been the dominant force in Southern California’s retail arena, thanks to low vacancy creating a competitive market, over 85 million square feet of shopping center real estate, and nearly 1.9 million square feet of retail space leased since the beginning of 2018. As some retailers gracefully bow out of the market or look to re-evaluate their space needs in a post-digital world, the tight and competitive Orange County retail sector rises to the top.

Right-sizing and notable store closures led to negative net absorption in all but one OC submarket, says CBRE. Healthy demand among retailers assisted in keeping vacancy low, but not enough to prevent a net loss in absorption over the last quarter. Lease rates still increased by 3.9 percent from last quarter to $2.42 per square foot. Though there were no construction deliveries in Q2, in North OC two large big-box tenants already signed at one center and are ready to open this year.

Meanwhile, the Inland Empire market took a bit of a hit during Q2, CBRE says. Vacancy increased by 40 bps due to the closure of several Toys/Babies “R” Us locations and other big-box-sized tenants, leading to -290,100 square feet of net absorption. However, average asking lease rates climbed upward from the beginning of the year to $2.03 per square feet, due to strong demand from eager tenants looking to edge their way into this expanding market, according to CBRE. A total of 63,695 square feet of new shopping center space was added during Q2, with just under 900,000 square feet of new construction still in the pipeline.