Q2 2012 San Diego, California Retail Market Trends

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Q2 2012 San Diego, California Retail Market Trends

After some hesitancy at the beginning of 2012, the retail real estate market is looking better. Reis reports a general uptick in rents and a slight, though measurable, decline in vacancy. Cassidy Turley notes the market is showing signs of “modest improvements.” Voit Commercial Real Estate reports that “retail is sunny in San Diego.”


Reis reports a second quarter 2012 San Diego community-neighborhood shopping center vacancy rate of 6.4%, down 10 basis points from one quarter earlier and down 90 from one year earlier. The days of sub-5.0% vacancy are gone, but the rate has been fairly steady, hovering in the range of 6.0% to 7.5% since 2009. San Diego’s power centers posted a second quarter vacancy rate of 2.3%, down 60 basis points over the year.

The vacancy rate “finished the second quarter at 4.96%, a decrease from the first quarter’s rate of 5.15%,” according to Voit’s second quarter 2012 retail report. “This was the lowest vacancy rate in three years.” According to Cassidy Turley’s First Half 2012 report, “Countywide total vacancy for all center types, including sublease space, was 6.0% in the first half of 2012 compared to 6.5% during the second half of 2011 and 6.7% a year ago.” This source notes that “the current vacancy of 6.0%” is 230 basis points higher than the 3.7% recorded at the start of the last recession, the second half of 2007; however, it is 120 basis points lower than the peak rate of 7.2% recorded at the end of the recession, the second half of 2009. According to Marcus & Millichap’s second quarter 2012 report, “Community center vacancy dipped 70 basis points in the last year to 5.5% in the first quarter, while neighborhood centers dropped 90 basis points to 8.0% during the same stretch.” Looking forward, Reis expects community-neighborhood center vacancy to finish 2012 at 6.1%, with subsequent gradual declines bringing the rate near 5.0% at the end of the forecast period.


San Diego’s community-neighborhood shopping center net absorption posted another positive quarter. The total for the second quarter was 67,000 square feet, bringing the year-to-date total to 127,000 square feet. Net absorption is not generally strong here. For the decade ending in 2011, 2.5 million square feet were absorbed, for an average of 251,000 square feet per year. For 2011, after several years of recession-induced negative totals, the market posted a positive 360,000 square feet. Thus, the current performance is at least on line to grant the market a positive, if not remarkable, annual total. It should be noted that while demand has been uneven, the market has been aided by no new construction. For 2011, Reis reports no community-neighborhood shopping center space completed. No such space completed through the second quarter of 2012. From 2002 to 2011, a total of 3.7 million square feet of community-neighborhood space was added to the market, averaging less than 400,000 square feet per-year. This is not a dynamic market on either the supply or demand side.

Reis reports three neighborhood centers under construction for completion in 2012: the Plaza at Las Americas in San Ysidro, the San Diego Mercado, and the Flower Hill Promenade. The 480,000-square-foot regional center at Civita remains under construction with no specific completion date. According to Cassidy Turley, “countywide net absorption was 281,535 square feet in the first half of 2012, which is double the amount absorbed during the second half of 2011.” “All center types recorded positive net absorption in the first half of 2012, with the exception of regional centers,” according to this source. Reis forecasts community-neighborhood shopping center demand to reach 281,000 square feet in 2012, down from earlier estimates, with annual totals gradually increasing thereafter. From 2013 to 2016, new construction will add less than 500,000 square feet of community-neighborhood space each year, according to Reis’ forecast. Although new supply will be coming in

at about the 2002 to 2011 average rate, it is still expected to trail net absorption each year of the forecast period.


Community-neighborhood center rents posted improved gains in the second quarter of 2012, Reis reports. Reis notes average asking and effective rents for community-neighborhood shopping center space at $28.36 psf and $25.39 psf. The average asking rent and the average effective rent increased 0.6% and 0.7% over the quarter and 0.7% and 0.8% year-over-year. Rents lost ground in 2009 and 2010 and were flat in 2011, approximating national trends. For power centers, Reis reports second quarter average asking rent of $36.10 psf, up 0.4% over the year.

According to Cassidy Turley, “the overall countywide monthly average asking rent for all center types was $1.99 per month per-square-foot triple net (NNN) in the first half of 2012,” This marks a 11.1% decrease from the peak rate of $2.21 recorded in the second half of 2009 and a 2.5% decrease from the $2.04 rent recorded a year ago, “indicating that rents are stabilizing. Freestanding, strip and power centers recorded the most improvements in asking rents from a year ago, a trend that is expected to continue,” Cassidy Turley reports. Voit reports that the average asking triple-net lease rate per month per-square-foot in San Diego County was $1.73 at the end of the first quarter, a decrease from the previous quarter’s average asking rate of $1.83. “This drop in rates is likely attributable to a change in the composition of availability. With vacancy continuing to fall, rates should stabilize.” Voit notes. This source forecasts that rates will rise in 2012. According to Marcus & Millichap, asking rents will “edge up” 0.9% and effective rents will increase by 1.2% in 2012. “Last year, asking and effective rents held steady as operators waited for clear signs of sustainable demand growth,” this source notes. Reis forecasts community-neighborhood center average asking and effective rents to increase by 1.3% and 1.5%, respectively, in 2012, finishing the year at $28.54 psf and $25.58 psf, higher than previous estimates. Annual gains in which both measures post increases exceeding 2.0% are not expected here until 2014.