Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/566807
M A R K E T H I G H L I G H T: S A N D I E G O 22 • September 2015 • Western Real Estate Business www.REBusinessOnline.com RETAIL RALLIES IN SAN DIEGO The San Diego retail market had another positive quarter, which built on the strength of the local economy. Strong job growth and low unemploy- ment led to positive net absorption and a spike in sales activities. The unemployment rate decreased across the board. San Diego posted a 4.9 percent rate, a post-recession low for overall unemployment. This is the frst time San Diego unemploy- ment has been sub-5 percent since the beginning of 2008. Local San Diego retail employment has been steadily increasing by 2.4 percent over the past fve years, according to CBRE Econo- metric Advisors. Annual growth for the next fve years, however, is ex- pected to be relatively fat. Despite the lack of space, there have been a few construction deliveries. Most of the current retail construction in San Diego is from mixed-use de- velopment and property renovations. Westfeld plans to spend $500 million to expand its center at UTC. It will also spend $300 million in Carlsbad where it intends to transform an indoor mall into an open-air center. Regional malls are leading the trend, and smaller cen- ters like Flower Hill Promenade and Del Mar Heights Town Center are keeping up with them. One of the most signifcant sign- ings this quarter was the entrance of Aldi into the San Diego market. They signed a 28,799-square-foot lease at North County Square, a centrally lo- cated power center that is anchored by Target and WalMart. The Aldi concept is unique to the hyper-com- petitive Southern California grocery market. Its no-frills approach ofers of-brand items at bargain-basement prices. What the consumer foregoes in experience they gain in savings, as opposed to other retailers that seek to ofer an experience beyond traditional shopping. While the grocery sector has always been strong, we saw restaurant sales surpass grocery store sales in the U.S. for the frst time in 2014. We are seeing some innovative, fresh concepts enter- ing the San Diego market, including Puesto, Cucina Enoteca, the Patio and the Pizza Studio. Full-service restau- rants are experiencing a sharp increase in popularity, and are subsequently in high demand across the market. Res- taurants are one of the most popular uses for San Diego retail product. This trend is forcing landlords to concede high tenant improvement (TI) allow- ances in their lease negotiations. Re- cent negotiations have closed around $100 per square foot in TI allowance for the most desirable operators in high-end submarkets, while the in- dustry standard has sat around $30 per square foot in past years. The San Diego retail market's over- all vacancy rate was 5.7 percent this quarter. This is down 250 basis points from the peak in the third quarter of 2011. As the market continues to tight- en, vacancy will continue to improve. About 90,375 square feet was ab- sorbed this past quarter, marking the fourth consecutive quarter of positive net absorption. This can be attributed to the delivery of the Village at Pacifc Highlands Ranch. This 163,560-sqa- ure-foot lifestyle center is 90 percent leased, with Trader Joe's anchoring the big box space. The market has signifcant capital — and with historically low interest rates, it is not a surprise to see sales ac- tivity for the quarter surpassing pre- vious averages. There was a total of $276.1 million worth of retail product sold, which was 23.3 percent higher than the four quarter average for 2014, which was $224 million. In fact, a few sales that closed after the quarter end- ed pushed year-to-date sales volume above the 2014 total — and we're only half way through the year! Landlords and developers are re- thinking the traditional shopping center experience in this ever-chang- ing retail climate due, in part, to the increasing strength of ecommerce. Retail is now about an experience. Developers are creating experiential spaces that feature fountains, fre- places, playgrounds, outdoor living rooms and other creative amenities that give people a reason to stay at the center longer. The Village at Pa- cifc Highlands Ranch is a great ex- ample of this trend, as it combines a future library, community garden, bocce ball court, kids play area and a dog park. Bradley K. Jones First Vice President, Retail — Specialty Service, CBRE DOMESTIC AND FOREIGN INVESTORS INCREASINGLY TARGET SAN DIEGO Commercial real estate inves- tors are increasingly targeting San Diego to put their money to work. The local commercial real estate investment sales market — which includes ofce, biotech, indus- trial and retail properties — saw more than $4.2 billion of property change hands last year, according to Real Capital Analytics. This is up nearly 28 percent from the $3.3 billion that traded in 2013. The trend ap- pears to be picking up steam. More than $2.7 billion traded hands during the frst half of the year, which represents about 67 percent of last year's to- tal. Last year was the ffth consecutive year we experienced increased sales volume after a base of $1.1 billion in 2009 and a high of $7.8 billion in 2007. While Newmark Grubb Knight Frank (NGKF) believes 2015 will see a continued increase in sales volume over the 2014 level, this prediction relies heavily on the ability of investors to access cheap capital. This should be feasible as long as interest rates hold steady through the second half of the year. Heightened demand in San Diego has been fostered by investors' ap- petite for yield. Ofce properties that traded hands throughout the coun- ty during the frst half of this year resulted in an average cap rate of 6.4 percent. Core and core-plus yields reached even lower. The Aventine, a 239,996-square-foot ofce building in the UTC submarket that is 91 per- cent occupied traded at a reported 4.8 percent cap rate this past June. The transaction proves institutional investors still seek the relative rewards of commercial real estate despite the tight market. This is especially true when compared to the benchmark 10-Year U.S. Treasury Rate, which was at 2.35 percent at the end of June. Foreign investors remain focused on investing in prominent cities that ofer attractive risk-adjusted returns and remain popular among the large institutional investor sect. Foreign purchases in San Diego commercial real estate accounted for about $413.3 million, more than 15 percent of the total volume in the frst half of this year. This is considerably higher than the $146.2 billion invested in 2014 and the $126.8 billion invested in 2013. Brent Bohlken Senior Managing Director, Newmark Grubb Knight Frank