San Diego Business Journal

San Diego's retail vacancy rates are among the nation's lowest.

The county vacancy rate is at 2.2 percent, according to San Diego-based Grubb & Ellis|BRE Commercial's midyear trends report released this month.

National vacancy rates for the past 10 years have remained at 7 percent.

The low vacancy rate is a result of supply versus demand, said Bruce Schiff, principal with the Carlsbad office of Grubb & Ellis.

"Our market is unique because we are so land constrained. We are next to the Mexican border, next to Camp Pendleton, next to the ocean, with mountains to the east," said Schiff. "A lot of the large land tracts have already been developed and the ones that are coming are in master-planned communities."

Schiff sees the majority of proposed projects opening in late 2008 and early 2009.

"We are having to go out and create land, look for opportunities to take down buildings that are obsolete or convert land zoned for something else," he said.

As of midyear, 746,000 square feet, or 1.1 percent, of retail space was under construction countywide, a decrease of 1.6 million square feet from mid-2006, according to Grubb & Ellis. Grand Plaza in San Marcos and 4S Commons in the Rancho Bernardo area accounted for a majority of the countywide net absorption of 762,000 square feet.

Both centers were pre-leased at the time of completion.

The county has 67.2 million square feet of retail space, with 1 million square feet planned and 1.7 million square feet of proposed projects, he said.

Schiff said while retailers may be having a difficult time finding space, developers are having a harder and harder time because of rising land costs.

"With the land costs going up so much and fees in certain cities going up, there is an adjustment period that needs to take place in sellers' expectations versus what a developer can pay for a piece of property to make it work," said Schiff.

Strong demand and limited new construction continue to place an upward pressure on countywide rental rates. The countywide overall weighted average asking rate was $2.20 per square foot, an increase of 10 cents per square foot, or 4.8 percent, from the summer of 2006.

Investors and tenants continue to compete for quality retail locations.

"We are seeing retailers paying exorbitant prices for good product and the product is not staying on the market very long," said Steve Fiorentino, sales associate with Coldwell Banker Commercial Almar Real Estate Group.

Fiorentino said the lack of product and increasing land and development costs are placing pressure on vacancy rates. He anticipates the low vacancy rates to continue through year-end and into next year.

"San Diego is a hot spot and I think it will continue to be an upcoming market for retailers and other businesses," said Fiorentino.

CB Richard Ellis Senior Vice President Dave Hagglund said he has seen the challenges retailers face when looking for new space.

In CBRE's second-quarter retail market review, Hagglund said renters and buyers are taking their time and doing their research to find the right location.

"Most retailers are developing strategies on where they need to locate and then closely monitoring trade areas for potential vacancy," he said in the report. "It can take months and even years for retailers to find a compatible space in a specific sub-market."

Market Trends

Other data collected by Grubb & Ellis include trends in the area's northern, southern, eastern and midcounty markets.

North County absorbed 660,000 square feet this year. The average asking rental rate was $2.11 per square foot with the highest average rate at $3.34 in Rancho Bernardo and the lowest in Fallbrook at $1.53. Overall vacancy rate was 2.6 percent with no vacancy in San Marcos and 4.7 percent in Fallbrook.

There is only one project under construction in North County. The Civic Center Plaza in San Marcos will feature 68,000 square feet of retail space. In addition, 1.6 million square feet of other projects are proposed.

The midcounty market absorbed a negative 15,800 square feet in the first half of the year. The average asking rental rate was $2.44 per square foot with the highest average rate at $4.06 in Del Mar and the lowest at $1.94 in Mira Mesa.

The vacancy rate was 1.2 percent in midcounty with a 0.1 percent rate in Mission Valley and 3.3 percent rate in Mira Mesa. There is no retail under construction in this area and only one proposed project.

The East County market's total absorption was a negative 27,400 square feet through June 30. The average asking rental rate was $1.90 per square foot with the highest average at $2.34 in La Mesa and the lowest in El Cajon at $1.56.

The overall vacancy was 1.7 percent with the lowest at 0.7 percent in La Mesa and highest at 3.1 percent in El Cajon. A 72,000-square-foot project in El Cajon is the area's only project under construction. There are two proposed projects in East County.

South County absorbed more than 144,000 square feet of retail space this year.

The average asking rate was $2.35 per square foot with the highest average at $2.96 downtown and the lowest at $1.57 in the Point Loma/Sports Arena area.

The overall vacancy rate was 3.1 percent with no vacancy uptown and 9.2 percent in the Point Loma/Sports Arena area.

There is 606,000 square feet of retail space under construction and 817,000 square feet of proposed projects.

Los Angeles also saw a low rate in the first half of the year with a 3.2 percent vacancy rate, according to Grubb & Ellis data.