Three reports say there is slippage in San Diego County’s retail market
By Thor Kamban Biberman / The Daily Transcript / July 21, 2008
San Diego County’s retail vacancy rate stood at 3.2 percent as of the end of the second quarter, but the deceptively low statistic may be masking a lot of pain, according to real estate brokerages Voit Commercial and Grubb & Ellis|BRE Commercial.
A third report, this from the San Diego Institute for Policy Research, notes that with the downturn of spending, the number of business outlets in San Diego has also diminished dramatically. “More than 5,900 local business outlets closed over the past year, including nearly 2,350 retail outlets,” the institute writes.
“Activity has fallen off sharply for mom and pop stores and smaller chain tenants as well as for retailers linked to the housing market, particularly home improvement and furniture stores,” G&E|BRE writes. “Many retailers such as Starbucks (Nasdaq: SBUX), Foot Locker (NYSE: FL), Blockbuster (NYSE: BBI), Banana Republic and Gap, among others, are struggling in this current downturn as sales are hurt by weakened consumer spending, and some have announced store closings.”
The San Diego Institute for Policy Research says it all goes back to housing. “The slowdown of consumer spending in San Diego is clearly a result of the bursting housing bubble and global credit crunch. “Consumers who refinanced or took out equity loans on their homes to free up cash for spending are now mostly spent out and highly leveraged in debt,” the institute continues. “While banks formerly encouraged homeowners to tap into their home’s equity for purchases, lenders are now abruptly turning the spigot off and limiting further spending.”
“Diminished consumer spending is another indication of the local economy slumping,” remarked Kelly Cunningham, the institute’s economist. “Generally, consumer spending reflects two-thirds of the economy, and this cut-back in spending reveals a further major hit on the local economy.”
More closures have meant more space to fill. Voit said the second quarter’s 3.2 percent level was compared to 2.79 percent during the second quarter of 2007. The G&E|BRE placed last year’s direct vacancy a bit higher at 3.1 percent. That second report said the retail vacancy was as low as 1.8 percent in the county as recently as 2006.
One of the lowest vacancy rates in the county can be found in the North County and Central Suburban Corridor submarkets, coming in at 1.58 percent and 2.57 percent respectively, according to Voit. Del Mar Heights, which has also seen a huge resurgence in its office market, posted a mere 0.93 percent retail vacancy, according to the Voit report. G&E/BRE, which defines the submarket as Del Mar, said the retail vacancy was 2.1 percent on June 30, but the G&E/BRE survey examined more properties.
Downtown’s retail vacancy by contrast was 6.43 percent according to Voit, and 6.1 percent, according to G&E|BRE. Much of the vacancies involve ground floor space in condominiums.
Neither of the surveys includes the vacancy in the major malls. Outside of Westfield’s University Towne Centre mall, Voit reported the vacancy for that UTC-area submarket was 7.54 percent — the highest of any submarket. The G&E|BRE report recorded a 2.2 percent vacancy for an area it defines as UTC/La Jolla — the combined areas yielding a different result. Overall, G&E|BRE says the supply is still low, with most of the space in older centers often in need of an upgrade.
So, while 2.1 million square feet was available as of the end of the second quarter, much of this was in centers with obsolete space.
“There are only five submarkets countywide — Chula Vista, College, Downtown, Point Loma/Sports Arena and San Marcos — with projects currently under construction, “G&E|BRE adds. The total comes to only 594,370 square feet — less than 1 percent of the existing inventory.
Incidentally, there is a huge disparity between how much rentable retail space is available in San Diego County and south Riverside County. While the G&E|BRE placed the total at about 68.7 million square feet, Voit reported the net rentable retail space was nearly double that figure at 132 million square feet. Again, it’s all about how the space is calculated. Currently, there is 833,924 square feet of retail construction under way, lower than the 915,999 square feet at this same time last year, Voit writes. Both brokerages suggest 1.5 million more is generally the norm.
Planned retail construction in San Diego County is also down. Currently there is 2.4 million square feet of retail space on the slate as being planned in San Diego and south Riverside counties, compared to last year’s 3.3 million square feet, Voit notes.
The general lack of supply is creating constrained demand for retail space in the San Diego County area and is putting upward pressure on lease rates, Voit noted. The average asking triple net lease rate was $2.08 per square foot per month this quarter. This, according to Voit, is two cents lower than last quarter and 1.46 percent higher than what was reported in the second quarter of 2007. The downtown submarket has an average asking triple net lease rate is $3.03 per square foot, Voit adds. G&E|BRE and Voit reported the north cities tended to have the highest lease rates at about $3.30 per square foot.