San Diego Big Box Absorption Climbs in 2018
Thanks in part to the Toys R Us closure putting several more retail boxes on the market in San Diego, big box absorption increased, with 18 total properties leased last year.
“Over the last couple of years, we typically have about 1 million square feet of big box retail space available, and this year was right around that same line,” Michael Peterson, a senior associate at CBRE, tells GlobeSt.com. “We did see an influx of space because of Toys R Us, but it wasn’t a surprising amount of space to see come back. We actually had stronger absorption than 2017, north of 600,000 square feet compared to 500,000 square feet in 2017.”
Currently, San Diego has a supply of 29 big box spaces totaling 884,021 square feet, just below the 1 million square foot average. However, it is likely that more supply will come online this year. “That is becoming a little more typical of retail. Recently, we saw Wal-Mart announcing big gains in retail sales at the same time that Payless announced store closures,” says Peterson. “It is different each day.”
However, this isn’t necessarily bad news. Retailers in need of well-located big box space have been responsible for most of the absorption. Smart & Final, Sprouts, Michaels and Bob’s Discount Furniture were among the retailers to sign leases in available big box properties last year. “It was a strong year for absorption, and we are seeing boxes absorbed by other retail uses,” says Peterson. “We don’t have a ton of these spaces opening up, and they are typically well located. Tenants are seeing the rightsizing of a previous operator as an opportunity to get into a market that would not have been able to get into before.”
While retailers are driving the absorption, some big box assets are good candidates to redevelopment into other asset classes, like multifamily and medical office. “If you look at the list of what is available, there are a few properties that are ripe for redevelopment,” says Peterson. “For example, the Toys R Us and Petco on Morena Blvd. is on a major thoroughfare in San Diego, and that is expensive dirt that landlords are excited to get back. That screams, ‘ready for redevelopment.’”
While multifamily has been a primary candidate for redevelopment projects, there has yet to be a major trend towards industrial conversion. At the moment, retail in retail assets is still the highest and best use. “We are not seeing that as much,” says Peterson. “In secondary markets is really where we are going to see a trend in that direction. You are seeing a medical influence as well on vacancies of this size coming back. Retail centers exist because they are close to the consumer. There are a lot of other uses that have a lot of value in being close to the consumer, so coming in and repurposing those boxes into medical or fitness. I can see logistics being one of those uses, but we haven’t seen that yet in San Diego.”