print header

# 1 Commercial Real Estate Information Company

  • Find Properties 
  • Market Properties 
  • Analyze Properties 
Products
Commercial Real Estate News

Despite Big Projects, SD Retail Space Remains Tight

Limited Construction, High Demand to Keep Vacancies Low in 2018
December 27, 2017
San Diego retail space remained tight following Westfield Corp.’s recent completion of a $600 million renovation and expansion at its Westfield UTC mall. The region has limited new retail construction on tap for 2018. - Rendering Credit: Westfield Corp.



Even San Diego’s showcase retail project of 2017 -- Westfield Corp.’s recently completed $600 million expansion and renovation of its Westfield UTC mall, which added 400,000 square feet of new shopping and dining spaces -- couldn’t put a dent in what remains among the nation’s tightest retail markets.

CoStar Group data shows that San Diego County saw more than 839,000 square feet of new retail space brought to market during the past 12 months; but the net absorption was nearly 1.1 million square feet. Most of the new space at Westfield UTC, including a 149,000-square-foot relocated Nordstrom, was leased up well before construction concluded.

There are other large retail projects on the horizon. But tenants likely won’t see much relief in 2018 from 2017 metrics including a vacancy rate that stood at 3.5 percent as the year drew to a close (declining 0.3 percent in the past 12 months and still below the historical average of 4.5 percent) and rents still growing at a 0.7 percent annual rate (though below the historical average of 1.3 percent).

CoStar recently tracked 28 predominantly small retail construction projects countywide -- most of them within neighborhood-focused mixed-use and single-family developments -- that are expected to deliver a total of slightly more than 330,000 square feet to the market in 2018. That’s less than the square footage delivered at Westfield UTC this year.

San Diego hasn’t been left unscathed by the continuing wave of store closures by the big retail chains. As 2017 concluded, for instance, it was not yet known what would become of a Macy’s location that closed earlier in the year in Mission Valley (the region still has 10 Macy’s operating, including two in Mission Valley).

However, other spaces vacated locally by major chain retailers (such as Sports Authority, Sport Chalet and Kmart) generally were quickly filled during 2017 by several that are still expanding in San Diego (such as T.J. Maxx, HomeGoods, Target and Aldi).

“Space in San Diego remains very tight and retail in this area has generally not been overbuilt,” Brad Jones, first vice president in the San Diego office of CBRE Group, recently told CoStar News.

“There are many quick-serve restaurants expanding in our market, however it is becoming more challenging to find the prime space for many in that category,” Jones said. “Discount and value retailers, such as Marshalls and HomeGoods, are absorbing big-box spaces since these retailers compete less with e-commerce.”

Experts say new projects in the works are expected to see high demand from local and national tenants. Next-door to Westfield UTC, owner Regency Centers is finalizing plans for a complete mixed-use replacement of its 30-year-old Costa Verde Center, expected to entail well over $200 million in improvements. In Carlsbad, Rouse Properties is involved in a major overhaul of its nearly 50-year-old mall now known as The Shoppes at Carlsbad, recently snagging new tenants including The Cheesecake Factory and Dave & Buster’s.

Though there’s a limited amount of high-profile retail product hitting the for-sale market, the region still saw around $1 billion in property sales volume in the past year, topping the historical average.

CoStar News contacted local retail property experts for their takes on what happened during 2017, and what they’re expecting in 2018.

Chad Iafrate, Senior Director, Cushman & Wakefield -- Volatility in the retail industry was the overshadowing topic for 2017. The departure of many retailers due to bankruptcy or consolidation continued, but retail vacancy rates in San Diego continued to trend downward as a result of the many brands that want to grow their footprint here. The San Diego retail market remains very desirable due to the strong demographic base.

Many retail landlords have taken a proactive approach in their leasing strategy by targeting specific operators and curating a special and unique experience for the consumer. This trend has been led by a surge in leasing activity to dining and entertainment users to help drive shoppers to many of these centers.

Omar Hussein, Vice President and San Diego Market Officer, Regency Centers  –  -- In 2017, we were pleased to see continued growth in a number of categories, including health and wellness, beauty, pet services and fast-casual dining. A few examples of these users include Rubicon Deli, 85°C Bakery Cafe, CorePower Yoga and LaserAway -- all of which can be found in our centers across the San Diego region. We also found that our core, infill San Diego properties continue to outperform those located in peripheral areas of the county.

John Vorsheck, First Vice President, Marcus & Millichap  –  -- The shortage of available land for retail development in the most desired locations, coupled with a 75 percent decline in deliveries to 210,000 square feet, will keep conditions equally tight in 2018. The resulting climb in the average asking rent will place prices per square foot above $25, a low-single-digit gain overall.

Bill Shrader, Senior Vice President, Colliers International  –  -- 2017 was a year of hip, urban restaurants heading to suburban neighborhoods. Staple restaurants of Little Italy and Uptown -- like Great Maple, Piacere Mio and Crack Shack -- announced or opened new locations in lifestyle centers in Carmel Valley, Del Mar and UTC.

The evolution of retail will continue in 2018 with edited store sizes, experiential shopping venues, and shared-use concepts. As consumers gravitate toward these new retail concepts, struggling retail centers will continue to be strained and likely repurposed. It’s probable we’ll see new ownership of and repurposed plans for downtown’s Westfield Horton Plaza in 2018.

Craig Killman, Executive Vice President, JLL  –  -- 2017 represented a major flight to quality for retail properties, capped off by Westfield’s renovation and expansion of the UTC mall. Quality is also a common theme on the tenant’s side of retail. Shopping centers like Forum in Carlsbad replaced underperforming tenants Kit & Ace and Ivivva with Everything But Water and Johnny Was -- two best-in-class retailers in their respective categories.

The year 2018 will hold more of the same, with Kilroy Realty Corp.’s One Paseo opening in late 2018 and Donahue Schriber’s expansion of the wildly successful Del Mar Highlands Town Center with Phase I of “The Collection” delivering in late 2018 and Phase II in late 2019.

Brad Jones, First Vice President, CBRE Group  –  -- Fundamentals have remained positive through 2017 in San Diego and we expect much of the same in 2018.

The beauty industry has also not been affected by e-commerce and has continued to hold strong sales, and has been up annually on a 4-6 percent yearly basis. The Lash Lounge, as an example, is looking to open 10-15 stores in San Diego County within the next five years. Additionally, there is a continued rise of experiential retail, such as Raised by Wolves, a cocktail bar and supply store set to open in UTC early next year. This type of unique retailer provides consumers an experience they can’t find online.



Lou Hirsh, San Diego Reporter  CoStar Group   

GET IN TOUCH        Contact CoStar News Team:   News@CoStar.com

 Find us on 

Welcome To CoStar's
Industry-Focused,
Award-Winning News

Winner of three Journalism Awards from the National Association of Real Estate Editors (NAREE)

Award-Winning News