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Retail Space Recovery Gets Help From Homes

For the third consecutive year, San Diego’s already healthy retail property market is expected by the end of 2013 to see significant recovery, as vacancies move closer to pre-recession levels.

The brokerage firm Marcus & Millichap, in a recently issued second-quarter report, noted that the resurgence in tourism combined with limited new construction helped fill up existing retail centers in the first phase of the recovery.

By year’s end, those drivers are expected to give way to a strengthening housing market and steady job growth, although the pace of that employment growth has slowed over the past six months.

The brokerage firm points to local factors including a 2.3 percent gain in local jobs and 3.3 percent rise in retail sales over the past year, and the 39,400 home sales that took place during the first quarter, up 18 percent from the same period of 2011.

Leisure and hospitality, among the key local bellwether industries, added 6,000 jobs over the past year for a 3.8 percent gain. The report notes that employment in that sector surpassed the previous peak during the first quarter, “an indication that further job gains are on the horizon.”

The region’s retail vacancy rate stood at 6.9 percent at the end of the first quarter and is expected to drop to 6.4 percent by year’s end. Several national retailers continue to scout sites for new locations, many with an eye toward serving consumers who remain budget-minded in the post-recession era.

“The value clothing retailers are out there in the market looking to expand,” said Alvin Mansour, a senior vice president in the San Diego office of Marcus & Millichap. “The natural foods grocers are also out there looking for space, and so are some of the value-oriented grocery stores.”

While vacated spots in well-located shopping centers generally get refilled quickly, due to a constrained supply of space, San Diego County has not been immune to store closings and real estate footprint downsizings by major retailers.

The office supply retailer Staples Inc., which has 20 locations in the region, recently closed its store at Santee Trolley Square, which had been a fixture at that location since the center opened 11 years ago. Center officials said Staples closed the 20,000-square-foot store on June 1 and will formally vacate the space by month’s end, after the retailer decided not to renew its lease.

“We are very fortunate, in that we’re received inquiries from several national retailers interested in filling that space,” said Dana Duncan, senior property manager with Vestar Property Management, which oversees the Santee center owned by Kimco Realty Corp. of New York.

Officials of Massachusetts-based Staples were not available for comment at press time. The nation’s largest office supply seller recently announced that it plans to close 40 stores this year, as well as relocate or downsize 45 others, after closing 30 last year in a move to boost efficiencies amid declining sales.

Marcus & Millichap said newly employed younger workers are creating households in urban neighborhoods close to local employment centers, such as North Park, South Park and University Heights. Retail vacancy in those areas “is extremely tight,” helping mom-and-pop stores to thrive.

The Interstate 15 corridor and eastern areas along Interstate 8 are seeing home supply stores and other necessity-based retailers benefit from an uptick in home sales.

Some Centers Still Struggle

In some submarkets, local centers that depend on smaller independent businesses are still struggling with vacancies. Meanwhile, those catering to national tenants are benefiting from a continued dearth of new retail center construction.

The brokerage firm notes that builders completed 250,000 square feet of shopping center space in the past year, enough to boost the local inventory by just over one-half percent, and the only project completed in the first quarter was the $30 million renovation of Flower Hill Promenade in Del Mar, which added 64,000 square feet including a new Whole Foods Market.

The pace of construction could pick up with continued economic recovery, which would likely drive retail rent increases.

‘Slow and Steady Recovery’

“It’s going to be a slow and steady recovery,” Mansour said. “As you see more consumer confidence and job growth, you’ll see more activity out there.”

Earlier this year, San Diego placed ninth in Marcus & Millichap’s annual ranking of the nation’s healthiest retail markets, based on factors such as supply and demand, construction, vacancy rates, and growth in jobs and household income.

The local region dropped from fourth place in last year’s ranking, as it tracked behind other metro regions on factors including vacancy declines and job growth.

San Diego over the past decade has consistently ranked among the top 15 metro markets in the yearly report, designed as a guide for retail property investors. The top five markets in this year’s ranking were New York, Seattle, San Francisco, San Jose and Orange County.

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