WESTERN SNAPSHOT, JANUARY 2010

San Diego Retail Market

One of the more significant retail stories in San Diego County is the lack of new development. Only one retail project totaling 20,000 square feet has been delivered since first quarter 2009, and there are no other projects currently under construction. The housing market crash, historic job losses, overall economic uncertainty, and a considerable drop in consumer confidence and spending combined with a lack of available construction financing to put the brakes on retail development throughout the county in 2009.

Faced with extraordinary economic challenges, San Diego County’s overall retail vacancy rate reached 6.2 percent in third quarter 2009 — the highest retail vacancy rate in the past 10 years. Compared to other markets, San Diego’s retail vacancy rate may appear enviable; however, several factors will determine whether vacancies continue to increase or stabilize.

Retail sales during the fourth quarter and holidays will be a key indicator of San Diego retail activity in 2010. Although many are predicting that 2009 holiday sales will be in line with 2008, which were historically low, it will be important to see how the numbers play out and also to see if poor performance leads to any further failures in the retail world, resulting in additional vacancies.

It will also be important to see if key players return to the retail lending market and if more liquidity is infused into retail asset investments. Only then will we see any type of normal sales volume taking place and be able to analyze cap rates to determine investment appetite and return expectations as the national economy begins on the road to recovery.

San Diego should fare much better than most other western markets in recovery. There is already a great deal of the larger box space being absorbed and backfilled by tenants. The lack of available inventory for so many years leaves many holes that retailers are now able to fill to further expand in San Diego County.

In addition, San Diego has little to no land inventory for retail development. The barriers to development and difficulty of entitlements and zoning have prevented overbuilding in the retail segment of the market. Therefore, the San Diego retail market does not have an excess of inventory in most submarkets.

The military presence in San Diego is also a stable economic influence and the city’s climate and tourism industry will continue to draw consumers to the market. The lack of available land, high barriers to entry and a strong tourism sector should help San Diego maintain retail stability and recover quicker than most other markets.

— Mike Moser is a senior vice president in CB Richard Ellis’ San Diego central office.

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