Discount Retailers May Capitalize in the Economic Uncertainty
By Joshua Ohl CoStar Analytics November 2, 2020 | 1:50 P.M.
The vacancy rate in the San Diego retail market is still relatively stable given the systemic dislocation that has hit the retail sector especially hard during the pandemic. It still rests below 5%.
However, net absorption — the difference between space moved into and moved out of — has tumbled more than 1.2 million square feet in 2020. That number is not expected to recover in the coming quarters, as store closures are likely to mount following the financial strain of reduced patronage and burdensome regulations put in place by state and local authorities.
The redevelopment of Horton Plaza took a sizable bite out of inventory in 2020, helping stabilize the vacancy rate. But under the base case forecast, the vacancy rate is forecast to rise above 6% and exceed the market's vacancy rate recorded during the Great Recession.
Following several department store closures in the first quarter, several smaller national retailers are following suit in San Diego. Pier I announced that it was closing seven stores, Tuesday Morning announced three store closures, Souplantation closed four regional restaurants, 24 Hour Fitness shuttered four locations in San Diego and Steinmart closed two stores.
But some retailers may find that the pandemic allows them to operate in a position of strength. Discount retailers have been expanding across San Diego since mid-year. One of those leases was for Dollar Tree, which leased 8,000 square feet at Del Norte Plaza. Discount specialty store Five Below has also signed several new leases since the third quarter, taking 12,000 square feet at the Mission Marketplace in Oceanside and 10,500 square feet at Escondido Promenade at the beginning of the fourth quarter.
Tractor Supply Co. also signed one of the largest pandemic-era retail leases in San Diego. It leased the entire 18,800-square-foot, newly built facility in Jamul during the third quarter for a brand new location. That building also sold in the fourth quarter for more than $430 per square foot.
It’s not terribly surprising that leasing velocity has slowed dramatically during the COVID-19 period, as businesses do their best to wait out the pandemic. Leasing volume has fallen by roughly 50% compared to 2018 and 2019. The average lease size is down as well. Leases signed during the pandemic average roughly 2,100 square feet compared to an average of more than 3,100 square feet over the preceding five years.