WESTERN SNAPSHOT, NOVEMBER 2009

San Diego Retail Market

1. MARKET MOVE 

The 76,000-square foot Paseo Carlsbad retail center, a Pac Ten Partners development in the Northwest County submarket, broke ground in first quarter and is expected to be completed in second quarter 2010. The project reflects the emergence of smaller retail centers, following a wave of large developments, particularly in South County, before the downturn of the housing market and economy. Given the more stringent lending standards and rising default rates, obtaining construction loans for large projects will become increasingly difficult, which should lead to smaller, highly pre-leased projects making up a greater share of local development in the coming quarters.

Investment activity in San Diego decreased in 2009, but buyers have begun to purchase the metro’s large inventory of single-tenant properties. Well-located fast-food restaurants, which still trade at a premium relative to other single-tenant properties, are changing hands fairly frequently.

2. MARKET MEASURE

The key market statistic to be focused on heading into the end of 2009 is vacancy, which ended third quarter at 5.5 percent, 170 basis points higher than year-end 2008. Despite the recent increase, the rate is still 440 basis points lower than the national figure and the lowest in Southern California. Consequently, rent reductions in the area have been more modest than in most of the rest of the country, a trend that will likely continue throughout the duration of the downturn in retailer demand.  

3. THE MARK OF A MARKET

What sets this market apart is its location and economic diversity. san Diego will emerge from the recession stronger than many other markets because of its economic diversity and positive demographics. The state of California is expected to experience one of the greatest booms in population in the next 50 years, spurring the need for additional multifamily housing, office buildings and retail centers. When jobs return to the market and the capital markets recover, multi-tenant and single-tenant retail investors will again target San Diego, one of the best places for investment on a long-term basis.

— Kent Williams is senior vice president and regional manager of the San Diego office of Marcus & Millichap Real Estate Investment Services. 

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