Retail Development Hits San Diego

SAN DIEGO—More than 27 projects covering more than 3.5 million square feet of retail space are planned for delivery in the next couple of years, according to a report from CBRE Research. Many of the projects, such as One Paseo, Civita and Horton Plaza, are rethinking the traditional retail center and seek to offer “experiential amenities” to attract a healthy mix of retail users.

Reg Kobzi, SVP at CBRE in San Diego, tells GlobeSt.com, “Retail centers in San Diego are looking to create an experience for the shopper. Consumers are now enjoying experiential amenities that include outdoor fireplaces, waterfalls, bocce ball courts, dog parks, community gardens and more. The future of retail is now more experience based with an emphasis on a sense of community.”

San Diego retail completions were bolstered largely by the delivery of the 277,500-square-foot La Costa Towne Square shopping center, bringing Q1 2015's net absorption to 333,476 square feet and marking the third consecutive quarter of positive net absorption for the region, the report says. Vacancy showed similar signs of positive growth, decreasing 10 bps to 5.6%.

As the market continues to tighten, lease rates continue to increase, trending toward pre-recession highs, according to CBRE. Over the last two quarters, rates have increased 10%, though there is still room for improvement since rates are still 17.4% below the peak of $2.41 in Q4 2008. After remaining relatively flat for 17 quarters, for the second straight quarter average asking lease rates saw a sharp increase, rising to $1.99. Most of the rent growth has been in Encinitas, Del Mar/Solana Beach, Downtown/Hillcrest, UTC, La Jolla, Mission Valley and Pacific Beach—some of the region's most-desirable submarkets—which posted a combined $0.18 increase between quarters.

Retail projects in the pipeline for San Diego include the Village at Pacific Highlands Ranch in Del Mar Heights, which is due for completion very soon and is 70% pre-leased, says CBRE. But redevelopment is also strong, with UTC, Horton Plaza and Plaza Camino Real—three of San Diego's major regional malls—all undergoing redevelopment projects in coming years. Horton Plaza has plans to demolish the former Robinson's May building, replacing it with a community park that will have more than 200 different events a year, which hints at the types of experiential amenities developers are planning to include.

According to Kobzi, “Pacific Highlands Ranch is a great indicator of the demand for space in the retail market.” He adds that there have been offers on every space and that “Starbucks and Trader Joe's are successfully opened, and we plan to have our grand opening in late summer.”

With substantial capital in the market and historically low interest rates, sales activity for the quarter unsurprisingly surpassed previous averages, according to CBRE. For Q1, there was a total of $233.2 million worth of retail product sold, which was higher than the four-quarter average for 2014 of $188.9 million. The largest sale for the quarter, on both a per-square-foot and a total-price basis, was the multi-property sale of four contiguous buildings—36,745 square feet of high-street storefronts—off Girard St. in La Jolla, which Rubben Coppel Bernal purchased for $26.5 million, or $721.19 per square foot.

Local San Diego retail employment has been steadily increasing by 2% over the past five years, according to CBRE Economic Advisors. Annual growth for the next five years is expected to continue at 0.8%, slightly slower than the predicted overall employment growth of 1.2%.

As GlobeSt.com reported earlier this week, it's been about seven years since the San Diego market has seen it, but speculative office development is back and more deliveries are expected in 2015, JLL's EVP Tony Russell told GlobeSt.com exclusively. We spoke with Russell after the firm released its first-quarter 2015 office report to find out his take on office completions, projects under construction and the factors influencing office construction in San Diego.