San Diego Retail MarketView Global Research and Consulting VACANCY RATE 6. NET ABSORPTION 4, Sq. Ft. CONSTRUCTION 441, Sq. Ft. LEASE RATE $1.78 NNN UNEMPLOYMENT 5. *Arrows indicate change from previous quarter FLAT QUARTER FOR SAN DIEGO RETAIL; MIXED-USE OFFERS NEW APPROACH TO GENERATIONAL SHIFT Figure 1: Net Absorption and Asking Lease Rate MIXED-USE COMMUNITIES GAIN TRACTION In order to evolve in accordance with a changing retail tide and generational shifts, developers and city planners are seeking alternative projects to both facilitate and stem the urban migration of working-age millenials. 's Sq. Ft. 5 25 Net Absorption Asking Lease Rate $2.5 $2. $1.5 DESIRABLE MARKETS SEE CONTINUED SUCCESS In San Diego's most desirable retail markets, vacancy is only 2.5% and has continued to trend downward since peaking at 4. in. The current lack of available inventory explains for increased asking rates. LUXURY CINEMA LANDS IN LA JOLLA Boffo Cinemas, a new luxury cinema brand, signed a 2-year lease in downtown La Jolla for around 23, sq. ft. The theatre boasts 7 screens and various luxury amenities for all age ranges. CONSTRUCTION ACTIVITY There were no retail deliveries this quarter, though construction activity increased. The Village at Pacific Highlands Ranch is expected to be delivered in 215 and La Costa Town Square is expected in Q4 214. (25) (5) Source: Research,. After a positive first quarter, San Diego s retail market was relatively flat in. Overall vacancy across the county remained at 6., continuing the general improvement that the market has seen over the past 3 years. Developers are remaining active; there is currently 581,6 sq. ft. of retail product under construction across the San Diego market. Net absorption, though down from the previous quarter, remained positive at 3,513 sq. ft. Additionally, year-to-date net absorption of 173,348 sq. ft. is a dramatic improvement from the negative total at the same time last year. The retail market is changing and retailers must adapt to a generational shift in consumer habits and the meteoric rise of e-commerce. Millennials make up about 25% of the American workforce, according to the U.S. Bureau of Labor Statistics; by 22, they will grow to represent 4 of working Americans. In order to react positively to this new generation, retailers, developers and city planners must adopt new practices to foster the urban migration of work-force millennials who continue to seek environments that harbor community, walkability and sustainability. Mixed-use centers are uniquely positioned to capture these consumers. Even in suburban clusters, where shopping centers have enjoyed unhindered success, an increase in mixed-use developments highlights the fact that the fastest growing generation, the one that is controlling an increasing share of the economy, wants a different shopping experience than their baby-boomer predecessors. $1. $.5 According to a Nielsen report titled Millennials Breaking the Myths, sixty-two percent of millennials say they prefer to live in mixed-use communities that promote, among other things, walkability. More than any previous generation, Millennials are showing a decreased dependence on cars. According to a study from the AAA Foundation for Traffic Safety, the number of cars purchased by young people, aged 18-34, fell almost 3 between 27-211.
Q2 21 23 24 25 26 27 28 29 21 211 212 213 214-YTD Q2 21 San Diego Retail MarketView 2 The same study noted that only 4 of teens obtain driver s licenses within the first year of their eligibility and only around half before turning 18. With a lack of dependence on motor vehicles, most millennials are looking to reside in places within walking distance of their favorite bar, restaurant and place of work. In order to appeal to the younger generations that will soon grow to consume the economy, a handful of suburban developers are adopting more urban strategies and building mixed-use projects in typically suburban neighborhoods. In San Diego, there are countless suburban mixed-use projects in the pipeline which illustrate the adoption of urban retail strategies in non-traditional areas. Amongst the numerous Power Centers and Super Regional Malls of Mission Valley sits Civita, a masterplanned, transit-oriented 23-acre community complete with retail, multi-family apartments, single family residences, and offices. Located on a former quarry site, the entire project is centered around a 19-acre community park and boasts a true live, work, play atmosphere. On a smaller scale, Coast Income Properties, The Village at Pacific Highlands Ranch, is a 24-acre masterplanned community with retail and multi-family residential units located off the 56 just east of Carmel Valley. Both examples highlight the necessity for developers and city planners to come together to create communities with vibrant atmospheres, walkability and sustainability. THE ECONOMY AND EMPLOYMENT San Diego s unemployment rate decreased 12 bps from last quarter; currently at 5., much of this decrease is believed to be due to seasonal summer jobs. California s unemployment rate decreased as well, down 14 basis points to 7.1%. National unemployment continued to improve, decreasing 4 bps this quarter to 6.3%. Econometric Advisors ( EA) reports that local San Diego retail employment has been steadily increasing by 1.2% over the past 5 years. In the last 12 months, the growth rate increased to 1.9%, in line with national trends. LEASE RATE ANALYSIS Average asking lease rates were down $.2, decreasing from $1.8 to $1.78 quarter-over-quarter. This quarter s slight decrease continues the trend of relatively flat rates across San Diego, as the quarter s average asking rate is the same as it was three years ago. However, vacancy has decreased by 17 basis points (bps) over the same period. As discussed previously, demographics and an appropriate location play a large part in retailer s success. In every market across the globe, retailers target accessible and suitable areas that attract a high amount of consumer traffic. San Diego s desirable submarkets, which include Encinitas, Del Mar/Solana Beach, Downtown/Hillcrest, UTC, La Jolla, Mira Mesa, Mission Valley and Pacific Beach have consistently outperformed the county with average asking lease rates commanding, on average, a 51.9% premium for the last three years. Recently, the desirable markets have performed exceptionally well. The current average asking rate is $2.69, a 51.2% premium to the overall market. In the last three years, the average asking rate for San Diego s desirable retail markets has increased by 8. while the overall market has decreased 4.3% over the same time. Figure 2: Unemployment Rate 1 12% Figure 3: Year-Over-Year Job Growth Y-o-Y % 2% (2%) () () Figure 4: Asking Lease Rate $2. $1.95 $1.9 $1.85 $1.8 $1.75 $1.7 $1.65 $1.6 US CA SD Figure 5: Year-Over-Year Rent Growth Y-o-Y % () (2) % Change # Employed Source: U.S. Bureau of Labor Statistics,. Jobs (M) 1.6 M 1.4 M 1.2 M 1. M.8 M.6 M Source: U.S. Bureau of Labor Statistics,. Source: Research,. Source: Research,.
Q2 21 Figure 6: Overall Vacancy Rate 2% Source: Research,. Figure 7: Availability Rate 11% 9% 7% VACANCY AND AVAILABILITY The San Diego retail market s vacancy was 6. this quarter, flat from the previous quarter and a 16 bps lower than the peak in. For the third straight quarter, San Diego s retail vacancy has marked its lowest vacancy rate since the beginning of the recession. In Q4 29, just before San Diego felt the effects of the 28 recession, vacancy was at 6.2%, showing that there is still room for improvement. With a surplus of available inventory and a vacancy rate of 1.3%, Southwest Riverside has been notably slow to recover from the recession and negatively impacts the rest of the county s vacancy rate. In San Diego s desirable markets, vacancy is only 2.5% and has continued to trend downward since peaking at 4. in Q3 211. When compared to the overall market it becomes apparent that desirable locations are both more resilient in economic downturns and stronger during recoveries. The current lack of available inventory illustrates how landlords in those markets have been able to increase asking rates despite the rest of the market decreasing during the same time. Net Absorption was relatively flat quarter-over-quarter, sitting just positive at 3,513 sq. ft. It is important to note that the Ashley Furniture in San Marcos relocated from their 73,46 sq. ft. box to an industrial showroom one exit away off Los Vallecitos. s retail stats, however, don t track industrial showroom product so the positive absorption from the relocation was not able to balance out the negative. San Diego Retail MarketView Figure 8: Gross Activity MSF 1.2 1..8.6.4.2. Figure 9: Under Construction 's SF 7 6 5 4 3 2 1 Source: Research,. Source: Research,. LEASING, SALES AND CONSTRUCTION ACTIVITY Leasing activity tapered off a bit from a strong first quarter, with 428,538 sq. ft. of gross activity. Though overall gross activity was down from previous quarters, there were still some positive transactions that will bolster San Diego s retail market. In one of San Diego s desirable retail markets, downtown La Jolla, a brand new luxury cinema concept called Boffo signed a 2-year lease. The theatre will include 7 screens, around 5-6 lounge seats each, and will offer the typical services that are now expected with luxury theatres. The Village at Pacific Highlands Ranch, a large mixed-use development that plans to include 163,56 sq. ft. of retail and 33 multi-family residential units, is still under construction and will be delivered in 215. Furthermore, the 277,5 sq. ft. La Costa Town Square community shopping center remains under construction and is expected to be delivered in Q4 214. Sales activity this quarter was $19. million, bringing the yearto-date total to $269.6 million. This is slightly below the previous five year average, over the first half of the year, of $344.1 million. Rancho Temecula Town Center, a 165,934 sq. ft. community center in Temecula, was purchased by JLL Income Property Trust for $6 million and was the largest trade of the quarter. Another impressive sale from the quarter was the CVS off La Jolla Blvd, which sold with a ground lease on the space to OWN Ltd for $8,7,, or $678.15 per sq. ft. at around a 5% cap rate. 3 Source: Research,.
Q3 214 Q4 214 Q1 215 San Diego Retail MarketView Figure 1: Market Statistics Market Area Building Sq. Ft. Overall Vacancy % Availability % Current Net Absorption Avg Asking Lease Rate Downtown 62,417 7. 8.1% 5,231 1,739 $2.5 South San Diego 9,757,424 5.1% 7.5% (1,89) 3,665 $1.77 East San Diego 11,398,7 6.5% 9.1% 18,433 77,872 $1.68 Central San Diego 16,541,9 3. 5.1% 35,913 116,981 $2.12 North County 21,329,997 7.9% 1.9% (6,335) 134,178 441,6 $1.89 SW Riverside 9,364,47 1.3% 14.9% 5,36 58,13 $1.57 San Diego County 69,12,152 6. 9.3% 3,513 428,538 441,6 $1.78 Leasing Activity Under Construction Construction Deliveries Community Center 23,35,596 6.5% 8.3% (112,434) 91,92 277,5 $1.88 Neighborhood Center 27,441,429 8.3% 11.5% 78,1 235,439 $1.75 Power Center 13,365,158 2.7% 4.9% 4,291 19,32 $1.84 Specialty Center 1,27,777 7.5% 12. 16,35 23,724 163,56 $2.27 Strip Center 3,584,192 8. 12. 17,251 58,963 $1.48 Source: Research,. Figure 11: Key Transactions Leases Occupier Industry Sector Location Sq. Ft. Leased Boffo Cinemas Theatre 7611 Fay Ave 23,72 Undisclosed Undisclosed 1725-1731 Euclid Ave 2, CVS Drug Store 4949 Santa Monica Ave 15,265 Electra Bicycle Consumer Products 11 S Coast Hwy 11 1,398 Lumber Liquidators, Inc Home Improvement 86 Los Vallecitos Blvd 1,6 * Renewal Source: Research,. Sales Property Buyer Location Price Rancho Temecula Town Center JLL Income Property Trust 3965-39716 Winchester Rd $6,, Miramar Square HP Investors, LLC 9212-9292 Miramar $12,55, 4 La Terraza Blvd Birtcher Anderson Properties 4 La Terraza Blvd $11,5, 76 Fay Ave 76 fay Ave 76 fay Ave $9,825, CVS - La Jolla Blvd QWN Ltd 5495 La Jolla Blvd $8,7, Source: Research,. Figure 12: Market Outlook 4 San Diego s retail market fundamentals were relatively flat this quarter, though certain signs point to positive growth. The retail vacancy rate remained flat quarter-over-quarter and average asking lease rates decreased slightyl from the previous quarter. Over the last couple quarters, lease rates and vacancies have slowly regained traction. The forecast for the retail market is expected to remain stable through 214. Rental rates are expected to increase modestly while decreasing vacancy and positive net absorption are expected to continue. 12-MONTH FORECAST Vacant % Vacancy Rate Asking Lease Rate 1. $2.4 Forecast 8. $1.9 6. $1.4 4. 2. $.9. $.4 Source: Research,.
CONTACTS SAN DIEGO RESEARCH Mark Fitzgerald Research Manager, San Diego 4365 Executive Dr. #16 San Diego, CA 92121 t: 858 646 478 e: mark.fitzgerald2@cbre.com Patch Cruzan Researcher, Retail 4365 Executive Dr. #16 San Diego, CA 92121 t: 858 646 479 e: patch.cruzan@cbre.com San Diego Retail MarketView Gary Baragona Director, Southern California Research & Analytics 355 S. Grand Avenue #27 Los Angeles, CA t: 213 613 313 e: gary.baragona@cbre.com Jill Luna Manager, Southern California Research 351 Jamboree Road, #1 Newport Beach, CA t: 949 725 869 e: jill.luna@cbre.com + Follow Us GLOBAL RESEARCH AND CONSULTING This report was prepared by the U.S. Research Team which forms part of Global Research and Consulting a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. Disclaimer Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of. 5