In an attempt to be efficient, I am going to give you a sneak peek at an article I just wrote for a commercial real estate trade paper on the state of the San Diego Retail Market.
The lights may have gone out in San Diego on September 8th but the economy and the retail market continue to churn and march forward on the path to recovery. Countywide retail vacancy hovers at 5.5 percent according to CoStar Group, however, Shopping Centers sit at just below 8 percent.
Because of the last recession, tighter lending requirements, onerous governmental processes and the lack of developable land, San Diego’s retail market is not overbuilt. Certainly, the economic malaise we are in has put stress on retailers big and small. An even bigger issue is the restructuring of the retail industry. Between Big Box Super retailers and internet sales, the demand for retail space has flattened. Just as our economy is retrenching so too are users of retail space. Service office users (doctors, lawyers, alternate healthcare, financial services, and education) are moving out of the office and into retail space offered at bargain rents but with better public exposure. Food uses continue to pop up taking advantage of the latest health trends or new ethnic cuisines.
New retail development in San Diego County is still scarce but the “green shoots” are starting to appear. Shea Properties is developing the Mercado Del Barrio in Barrio Logan anchored by Northgate Market plus an approximately 50,000 square feet of shops and service uses. Part of a mixed-use redevelopment, the project is also to include ninety-two apartments and a community college. Additionally, Sunroad Enterprises has announced plans for a 500,000 square foot shopping center in Otay Mesa. This Big Box Project is expected to serve the eventual population of the Mesa but also provide for tens of thousands of consumers across the border.
At the North end of the County, the coastal market has held up with less vacancy and fewer rent declines than the inland markets. A tough economy and tighter immigration policies have contributed to higher unemployment and a shrinking population which translates to fewer deals and higher vacancies. There are a few bright spots such as two new hospitals under construction Palomar Hospital in Escondido and Kaiser Hospital in San Marcos. These users are sure to be job generators and economic stabilizers in the future. Stone Brewery continues to grow and is now the fourteenth largest craft brewer in the United States with plans for the addition of a boutique hotel and new brewpubs in North Park and Liberty Station near Lindberg Field airport. San Diego has become the Napa Valley of Craft beer brewing. Lexus of Escondido has opened a mega facility. The dealership sells cars, offers wedding and meeting venues, a coffee house, golf simulator, and now Ventanas an upscale restaurant from the Cohn Group.
The Big Box fallout from the Great Recession was quickly stemmed in San Diego by retailers seeking a foothold in the market. Most spaces were quickly taken by Best Buy, Dicks Sporting Goods, Ross, and Sprouts. We are seeing the excess of small shop space caused by the economy and structural changes to the industry being slated for lease at lower rates to service/office or for redevelopment by tenants like Fresh & Easy and Big 5 Sporting Goods. Petco continues to seek sites but has launched a small store concept, Unleashed, to get into tighter more expensive markets and take advantage of redevelopment opportunities. Kahoot’s a pet store competitor continues to roll out its stores. The big banks, Chase, Wells Fargo, and CITI are seeking sites and growing market share. Dollar Tree is trying to take advantage of low rents and hungry landlords to grow its footprint in the market. New food concepts are springing up. The burger wars are continuing. Besides the usual suspects, In-N-Out, Sonic, Smash Burgers and Five Guys all are seeking growth. Lots of new food concepts, sit down and fast food, are seeking growth throughout San Diego.
Things are still tough in the market. However, there is just too much good information out there and real estate in San Diego is in just too good of shape to stay at these levels. The financial, technology, healthcare and education sectors are coming back and are the “emerging leaders. San Diego gained 20,100 nonfarm jobs from 2010 to 2011. The light is on at the end of the tunnel. It is time to work hard, be productive and pray for recovery. In the movie catch me if you can, the infamous con artist Frank Abagnale Jr (Leonardo DiCaprio), who collected cash passing himself off as an airline pilot, doctor and lawyer said when asked to say grace “Two little mice fell into a bucket of cream. The first mouse quickly gave up and drowned, but the second mouse, he struggled so hard that he eventually churned that cream into butter and he walked out. Amen.”
In keeping with the churned butter story above, I was pleased to hear Christopher Thornberg at Beacon Economics, confirm that things are dim, “but the chance of us shrinking back into another recession in 2011 is pretty close to zero percent.” The USD Real Estate index faltered in August mirroring the slow August that we saw at CDC. September has seen more activity but still not much closing. We’re doing our best to drag these deals across the finish line!
So keep on struggling as we figure out how to step out of this hole or… I hope you enjoy the story (sorry it is a repeat of 2007 but it is very fitting with the state of things and the mouse story above).
The Donkey Story
One day a farmer’s donkey fell down into a well. The animal cried piteously for hours as the farmer tried to figure out what to do. Finally, he decided the animal was old, and the well needed to be covered up anyway; it just wasn’t worth it to retrieve the donkey. He invited all his neighbors to come over and help him. They each grabbed a shovel and began to shovel dirt into the well.
At first, the donkey realized what was happening and cried horribly. Then, to everyone’s amazement, he quieted down. A few shovel loads later, the farmer looked down the well and was astonished at what he saw.
As every shovel of dirt hit his back, the donkey did something amazing. He would shake it off and take a step up. As the farmer’s neighbors continued to shovel dirt on top of the animal, he would shake it off and take a step up. Pretty soon, everyone was amazed, as the donkey stopped up over the edge of the well and trotted off.
The Moral:
Life is going to shovel dirt on you, all kinds of dirt. The trick to getting out of the well is to shake it off and take a step up. Each of our troubles is a stepping stone. We can get out of the deepest wells just by not stopping, never giving up! Shake it off and take a step up!
Ok, that’s enough of that B.S…The donkey later came back, caught the farmer out in the field and kicked the *#?* out of him. Then he went over to each of his neighbors’ farms and kicked the *#?* out of them too for helping.
The REAL Moral:
When you try to cover your ass, it always comes back to get you.
