San Diego’s retail market is going strong heading into the critical holiday shopping season, with several key real estate deals and predictions for a strong year in 2024.
“Recent surveys suggest that the consumer plans to shop to at least the same level they did last year,” said John Hickman, managing director at NewMark Merrill Companies, which has about 30 grocery-anchored shopping centers throughout San Diego County.
“The San Diego retail market is just very healthy,” Hickman said.
“With the backdrop of rising interest rates, we’ve seen a lot of challenges in different markets, most notably office, and to a certain extent, industrial. We have not seen that level of challenge with retail,” Hickman said. “To be honest, retail is really hanging in there, performing nicely.”
Bryan Cunningham, a senior vice president with JLL, said that 2023 has been a year of steady growth for retail in San Diego County.
“San Diego is still a target for most national retailers, both ones that are here already and new concepts coming to San Diego,” Cunningham said. “I think San Diego is near the top of most tenants list.”
Cunningham said he’s “very bullish” on the retail market in San Diego, in part because there is such a limited supply of retail space and little new retail construction.
“We feel like our supply is limited enough and the tenant activity is strong enough that we’re going to continue to see the quality assets stay well occupied,” Cunningham said. “We’re going to see consistent demand in well-anchored shopping centers and we’re going to see moderate rent growth.”
Good Year Expected in 2024
Among the encouraging signs as 2023 comes to a close was the opening of a 30,000-square-foot small format Macy’s store in the Santee Trolley Station shopping mall and the October sale of an Encinitas shopping center for $26 million.
“Macy’s was attracted to the strong tenant mix at Santee Trolley Square,” said Brian Quinn, a JLL senior vice president. Quinn and Cunningham brokered the Macy’s deal on behalf of Kimco Realty Corp, which owns the shopping center.
Macy’s took over a space that had been leased to Bed Bath and Beyond, which is fairly typical for San Diego retail centers.
Hickman said that in the centers owned or managed by NewMark Merrill, whenever a tenant leaves, their space fills up quickly.
“There have been three or four offers from other good quality, replacement tenants,” Hickman said.
Among the more recent retail property sales, the 60,492-square-foot Rancho Santa Plaza at 162 S. Rancho Santa Fe Road, anchored by Harvest Ranch Market is set for “significant upgrades,” said Mike Moser, a partner in Retail Insite, who brokered the deal.
“The center is in a great location, great demographics, and it was owned by a family that was the original developer,” Moser said.
Moser said that he received multiple offers for the property, but that, in general, high interest rates have put a crimp in the sale of retail property with fewer sales to large institutional investors – the real estate investment trusts, or REITs as they’re known.
Nevertheless, Moser said that, “We expect a good year in 2024.”
On the leasing side, Moser said “There’s a lot of continued demand for space.”
“We have a lot of projects and a lot of deals going on,” Moser said.
Fashion Valley Mall in Mission Valley, among the biggest centers in the county, is finishing a multi-million-dollar renovation with new store facades, upgraded walkways and bridges, and new stores.
Work on the renovation began in 2019 but was put on pause almost as soon as it started due to the COVID-19 pandemic, resuming in January 2023.
Bleusalt, a luxury clothing outlet, in November opened its first San Diego store in Fashion Valley Mall.
Other newcomers include Bottega Veneta, David Yurman, Dolce & Gabbana, Tudor, Veronica Beard, Zimmermann, Aritzia, and Craft House Fashion Valley.
Earlier this year, two other Mission Valley shopping centers were sold by Unibail-Rodamco-Westfield – Westfield Mission Valley East and Westfield Mission Valley West Center.
In downtown, The Arcade Monsters, an entertainment company based in Florida, leased a 12,400-square-foot building in the Gaslamp Quarter in August as its first West Coast location.
“For the most part, it’s been pretty steady on the investment side of things,” Hickman said. “In any given year, there are a lot of the larger centers that traded and that has sort of remained the case over the past six to 12 months.”
Retail Properties a ‘Stable Asset’
CBRE, in its third quarter review of San Diego County’s retail market, reported that vacancy rates fell in most of the county’s submarkets, with the vacancy rate in Central San Diego falling to its second-lowest figure on record at 2.7%. The record was 2.6%, set in the fourth quarter of 2018, according to CBRE.
Countywide, the vacancy rate was “well below the market’s one-year average” at 4.6%.
CBRE reported that “empty retail space has become increasingly hard to find.”
On the downside, CBRE reported that high interest rates have put a damper on new retail construction.
“Retail construction has been a rare sight in San Diego for many years, including again in 2023,” CBRE reported, with no new projects delivered in the third quarter.
Brandon Isner, CBRE head of retail research for the Americas, said that the vacancy rate nationally dropped to 4.8% in the third quarter, the lowest it’s been since 2005.
“Retail is a stable asset class and it’s going to remain so,” Isner said. “We expect rent growth to remain steady.”
Reg Kobzi, a senior vice president and retail leasing and sales specialist with CBRE, said that neighborhood shopping centers have been the strongest category in San Diego’s retail real estate market.
“Neighborhood centers have always been the most desired product,” Kobzi said.
Hickman of NewMark Merrill is optimistic about retail’s performance in 2024.