u201cActivity is strong, and while the urban market has been dominated by independent entrepreneurial operatorsu2014primarily restaurantsu2014we are seeing renewed interest among multi-unit soft goods retailers as well,u201d says Shrader.

SAN DIEGO—Cushman & Wakefield’s recently released year-end Downtown San Diego 2014 Market Assessment reports shows a continued upswing in the Downtown retail market. The year-end retail vacancy rate was the lowest since 2003 at 6.4% and the market saw year-over-year positive net absorption of 182,221 square feet, a 42% increase from 2012.

Leasing activity and retail absorption, according to the report, were positive for the third consecutive year in Downtown. Nearly 225,000 square feet of retail and street-level lease transactions were signed in 2013, the majority to restaurants, service-oriented retail and creative office users.

As of year-end there were 329,359 square feet of vacant ground floor commercial space downtown, within a total inventory of five million square feet.

“Activity is strong, and while the urban market has been dominated by independent entrepreneurial operators—primarily restaurants—we are seeing renewed interest among multi-unit soft goods retailers as well,” says Bill Shrader, senior director and leader of the Cushman & Wakefield Urban Property Group.

After nearly 10 years of planning, The Headquarters, located at the former Police Headquarters building adjacent to Seaport Village, opened in the Marina District with tenants including The Cheesecake Factory, Eddie V’s, Seasons 52, Pizzeria Mozza and Puesto. Following the craft beer trend in San Diego, Ballast Point opened in Little Italy, Stone Brewing Company opened in the Columbia District and signed a lease for a new Ballpark location. Redevelopment and renovation of Horton Plaza attracted new tenants, such as Jimbo’s Naturally who expanded to the market.

“2014 will be the year of reinvention, where many existing restaurants will change hands,” says Shrader. On the heels of El Vitral’s transition to South Paw, Donovan’s Prime Seafood will soon become Union Kitchen. Over the next year, The Palm will convert to Water Grill, Rock Bottom will transition to Tin Roof, Fred’s Mexican Café will transition to Don Chido and Jimmy Love’s will update its space with new partners. “We are likely to see other conversions this year, bringing the market to current trends in the food and beverage industry,” adds Shrader.

“While there is still residual economic uncertainty among peripheral retail locations, we are seeing significant improvement on prime high street locations such as Gaslamp on 5th Avenue and India Street in Little Italy,” says David Maxwell, associate director with the Cushman & Wakefield Urban Property Group.

Although the average rental rate for Downtown overall declined slightly in 2013, those neighborhoods with vacancy rates below 5% are seeing rental rate growth driven by the competition for prime locations. Gaslamp Quarter rents for retail shops have risen to $6 to $8 per square foot for prime 5th Avenue space, while rents in peripheral Downtown locations are averaging $1.50 to $2.25 per square foot, says C&W research. The demand for retail space on 5th Avenue is strong, and with the absorption of the former Borders Building, the vacancy rate has dropped to 3.8% in the Gaslamp Quarter.

Two of the eight neighborhoods reported a vacancy rate under the Gaslamp’s rate of 3.8%. Columbia’s vacancy rate of just 1.8% is due to its limited retail inventory in a prime residential location and proximity to Class-A office buildings. Downtown’s first waterfront retail in over a decade is expected to break ground at Lane Field in 2014. Little Italy came in 2nd with a vacancy rate of 2.1%. Juniper and Ivy recently opened in Little Italy and Consortium Holdings’ Ironside Oyster and Bird Rock Coffee Roasters are a few of the anticipated openings in 2014.

The C&W report shows that East Village made significant improvement with 34,523 square feet of absorption bringing the vacancy down to 8.5%. This marks the first time the vacancy rate has been under 10% since 2002. Multiple projects are expected to deliver in 2014, adding 20,000 square feet of retail inventory.

“The Downtown market will continue to be a top tourist and entertainment destination,” says Maxwell, “but the biggest growth will continue to come from the residential and daytime population demand.” The Ballpark neighborhood specifically is anticipated to greatly benefit from the new Sempra Energy Headquarters building at 7th and Island.

The retail supply pipeline is expected to stay at historic lows and the residential sector will comprise a large portion of the new development pipeline. With the diminishing supply of street-level retail, it will be difficult to maintain the current pace of leasing activity in 2014. Vacancy will not drop at the same rate as it did in 2013 but an improvement of a single basis point is expected.

It may take another year for rental rates to rise significantly throughout Downtown, but the Gaslamp, Little Italy and Ballpark neighborhoods should see competition for space push rents higher due to the scarcity of available spaces, says C&W.