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Investment in San Diego Retail Properties Showcases the Uncertainty in the Market

Deal Flow Falls Through the Floor in the Second Quarter

By Joshua Ohl CoStar Analytics

June 19, 2020 | 12:50 P.M.

Like much of the country, San Diego’s retail market faces severe headwinds. Retailers are reopening across the region in a starkly different environment from pre-pandemic, with social distancing protocols in place that may cripple business’ ability to remain viable.

And that same concern extends to the investment market. Liquidity has been hampered by the inability to underwrite properties given the current state of affairs. That’s resulted in banks tightening their belt on loans, with few wanting to add heightened risk to their portfolios.

Evaluating pro formas on multi-tenant properties, or even single-tenant properties, is difficult. While a tenant roster might have staggered leases, it’s less than certain now, more than is normal, that those tenants will remain in business for the length of the lease or be able to pay their rent in the near term. Co-tenancy clauses also add an additional wrinkle of uncertainty.

Even national, credit-worthy tenants have sought rent forgiveness or rebates, while many others have closed. Since the outbreak of the coronavirus, Pier 1, Nordstrom, Papyrus, Tuesday Morning and 24 Hour Fitness have all announced pending closures in San Diego.

Consequently, deal flow has fallen through the floor. After the first quarter recorded the fewest trades since 2010, the second quarter is on pace to shatter that floor. Through the middle of June, only 44 deals have recorded across San Diego. That’s 50 fewer than in the first quarter.

So far, only $125 million in trades have transacted this quarter. That pace would equal the lowest quarterly sales volume in a decade if it continues.

Perhaps unsurprisingly given their essential tag, two grocery stores were among the biggest deals to have closed in the second quarter.

Vons occupied one of the properties on 30th St in North Park. It sold for $27.7 million, or $630 per square foot. Its triple net lease runs through the middle of 2039.

The other involved an Albertson’s on 14th Street in downtown San Diego. It sold for $22.2 million, or $516 per square foot. The grocer’s triple net lease runs through 2031.

At the same time, pricing is widely expected to falter on the back of rising vacancies and weakening rent growth. That comes after market pricing, based on the estimated price movement of all properties in the market and informed by actual transactions, reached $345 per square foot during the second quarter – a record high. But market pricing is anticipated to fall during the forecast.

Market capitalization rates contracted to a 15-year low during the quarter, reaching 5.8%. However, as pricing softens and uncertainty reigns, capitalization rates are expected to rise upwards of 100 basis points in the first half of the forecast. However, we do not anticipate them rising to the same heights as they reached during the Great Recession.

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