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San Diego’s Retail Market Shows Momentum

Discount Retailers, Fitness Tenants Continue To Scoop Up Space

By Joshua Ohl CoStar Analytics May 18, 2022 | 8:11 AM

San Diego’s retail market shows few signs of the dislocation that it saw following the onset of the pandemic.

Demand tumbled in 2020, and negative net absorption — which measures the change over time of space moved into and out of — piled up to more than 2 million square feet over a five-quarter period.

However, since the second quarter of 2021, the San Diego retail market has seen four straight quarters of positive net absorption totaling more than 1 million square feet. The region is amid its longest such streak since 2016, which is expected to reach five quarters at the conclusion of the second quarter, given its current trajectory.

The vacancy rate has fallen to 4.6%, a year-over-year drop of 0.9% after peaking at 5.5% last year. The current rate, which is likely to contract further, compares to the five-year market average of 4.5%. Occupancy is likely to rise further after roughly 1% of San Diego’s retail inventory has been purchased since last year with the intention of redeveloping it, most often into housing. That could spare the market to a degree from the long-term vacancies that have proliferated many of these properties.

Area landlords penned the most new retail leases in the trailing 12 months through the first quarter of 2022 since 2017, equating to more than 3.3 million square feet of space. That was the highest level of leasing volume since 2019. In the first quarter alone, more than 330 leases were signed, summing to nearly 900,000 square feet. That was the second-highest leasing volume in nearly three years.

Amid the ongoing pandemic, while the number of new leases signed has accelerated as many opportunistic tenants scooped up the best available spaces, often at a discount, the total square footage leased did not accelerate at the same pace. The average new retail lease, at 2,310 square feet, has fallen to its lowest figure since 2014 as retailers continue to downsize amid a secular shift in consumer habits and the rise of e-commerce. For context, the average new retail lease in San Diego inked from 2015 until the start of 2020 was 550 square feet larger.

Fitness tenants and discount retailers have been among the larger lessees locally over the past several months.

Deal Hunterz signed the largest new lease in the first quarter, totaling 23,000 square feet, at Border Village in San Ysidro, California. Aldi also continued to expand across San Diego with its recent deal for 22,000 square feet at Rancho San Marcos Village. TC Lifting Club replaced Office Depot along the Morena corridor after leasing the vacant 20,000-square-foot space, while 24-Hour Fitness recommitted to its 40,000-square-foot location at La Costa Town Square in Carlsbad that it had closed in 2020.

Rent growth has responded and has accelerated to more than 5% on a year-over-year basis. However, when adjusted for inflation, which totaled nearly 8% in the latest release of the Bureau of Labor Statistics Consumer Price Index, rents were still falling on an annualized basis in real terms.

Although locals are feeling inflationary pressure on their wallets, San Diego’s retail market finds itself in a strong position, particularly as convention traffic is returning and the tourism season is on the doorstep and is likely to return to pre-pandemic levels.

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