Retailers, Investors Still on the Hunt in Property Market

Local retail property investors and tenants will be cautiously watching in 2012 for signals of a repeat performance of 2011, a year in which most signs pointed to a steady if unspectacular recovery from the Great Recession. Financing rates remain historically low but competition is high for investors chasing a limited supply of prime shopping center properties in San Diego County, with little new construction on the horizon. The jobs picture is brightening, consumer confidence and spending has been rising for the past several months, and numerous national chains are seeking to expand in a region that retains one of the nation’s lowest retail vacancy rates. Setting Sights on S.D.“Investors are looking at San Diego, and retailers are looking at San Diego,” said Scott Trafford, senior vice president with commercial brokerage firm Jones Lang LaSalle. For 2012 and beyond, Trafford said the San Diego region will remain attractive to retailers and restaurant operators, largely because a rise in consumer spending is supported by a diverse job base, which draws from industries including tourism, high-tech, the military and health care. In the early months of this year, the unknown will be how much the last quarter of 2011 — hit with market volatility sparked largely by wavering debt markets in Europe — impacts U.S. markets and investor psyches. “A lot of capital has been chasing deals (in the past year), but the transactions have slowed recently,” Trafford said. On the leasing front, experts anticipate a sequel to a 2011 market in which several national chains — ranging from Kohl’s and Nordstrom Rack, to Pinkberry and Smashburger — set their sights on San Diego, planning or opening new locations. Burger BonanzaBill Thaxton, senior vice president with San Diego-based Flocke & Avoyer, which oversees sales and leasing at 110 retail properties in the region, anticipates that the gourmet burger chains will continue to stake out spots in San Diego County, reflecting the rising popularity of that segment. Emptied locations of recently defunct retailers will continue to fill up quickly. For instance, Thaxton said Mission Foods Corp. is in the process of setting up a tortilla bakery — among its first U.S. stand-alone locations — in a former Blockbuster video store space in City Heights. Also taking spaces in the region, he said, will be the growing specialty grocers catering to the Hispanic community, such as Northgate Gonzalez Market, which opened new stores during the past year at Barrio Logan and City Heights. With consumer frugality still in vogue, watch for value-oriented retailers like Ross Dress for Less, as well as the numerous dollar-store chains, to continue scouting local sites, Thaxton said. The major grocery and drugstore chains will be actively looking to set up new stores catering to specific neighborhoods. For instance, he said Flocke & Avoyer is working with a subsidiary of Safeway Inc. on a grocery-anchored center planned for Carlsbad’s La Costa area. Retailers’ moves to downsize their store formats, which accelerated in 2011, will continue to play a role in 2012. “You’ll see the retailers continuing to bring down their square footage to save on overhead costs,” said Ron Pepper, principal and co-founder of San Diego-based brokerage and consulting firm Retail Insite. He said national chains already planning or opening smaller stores nationwide include Best Buy, Office Depot, Staples and San Diego-based Petco Animal Supplies Inc. Smaller stores not only cost less to run, but give the chains more choices as to where they can locate. Pepper said that is crucial in places like the San Diego region, where nearly all of the vacated big-box space has been filled up during the past three years. Most recently, he noted, all five local bookstore sites vacated by the defunct Borders Group Inc., which closed in mid-2011, have either been leased up or are close to landing new tenants. Thaxton said all that activity means that while tenants will still have bargaining room with landlords in outlying markets, lease rates won’t be coming down soon at the prime retail centers. “Rents at some of the A-location centers are as high as they’ve ever been,” he said. In its recently released U.S. Retail Outlook report, Jones Lang LaSalle noted that the San Diego region’s overall retail vacancy rate is currently at 5.2 percent, among the lowest for U.S. metro areas and well below the overall national rate of 7 percent. Approximately 215,000 square feet of retail space is currently under construction locally, but more than 65 percent of that is already pre-leased, meaning the vacancy rate will not be rising significantly anytime soon.