In the News 2006
San Diego Ready for New Development.
February 27, 2006
With a few million square feet under construction, tenant and investor demand still high.
The only thing constant in San Diego County's retail market is change.
That's because there are very few sites available for new shopping centers, leaving the future of retail in the hands of urban mixed-use developers, even in the suburbs. Still, Chula Vista will see the completion this year of the county's first regional mall in 20 years - and likely its last for many years to come.
The limited supply of land means few new large-scale projects to compete with existing properties, resulting in Low vacancy, using rental rates and intense investor interest.
"Retail in San Diego County closed very strong in 200,. both on the investment and leasing side," said Bruce Schiff, a principal at San Diego-based Grubb & Ellis|BRE Commercial. "A lot of the centers that we handle are full or have very low vacancy. The new stuff coming out of the ground is leasing very well. There's only a handful of new centers that get built every year:"
Costa Mesa developer World Premier Investments is budding a 352,000 square-foot center called Grand Plaza, anchored by Nordstrom Rack, Shoe Pavilion, Ross, Marshalls, Sports Chalet, Bed Bath & Beyond and Petco at Las Posas Road and State Route 78 in San Marcos. Schiff said the site is the last large parcel on the Route 78 corridor.
According to Grubb & Ellis|BRE San Diego County added 500,000 square feet of new retail space during the second half of 2005, which was more than 90 percent leased upon opening. Another 1.5 million square feet was under construction at year's end, with retail vacancy at 2.1 percent at year-end 2005.
John Still, senior vice president at San Diego retail brokerage Flocke & Avoyer, said rents will continue to climb, but he expects some moderation in 2006.
"Vacancy will stay relatively the same as 2005," Still said. "I think what you'll see is a little less growth in the rents than you've seen in the last couple of years."
Rental rates averaged $1.88 per square foot per month in the fourth quarter, but reached as high as $3.50 in Carmel Mountain Ranch, $3.93 in Del Mar $3.33 in Downtown San Diego and $2.91 in Encinitas.
"We had a major surge in rent increases over the last three years," said Colton Sudberry, vice president of development at San Diego-based Sudberry Properties Inc. "We're continuing to see rent increases, but I think we've had such a major runup that they're starting to level off and increase at a more moderate pace."
New Development
The developer began construction Feb. 15 of Village Walk at EastLake, a 162,000 square-foot center on 13.25 acres in eastern Chula Vista anchored by Borders, Petco, Pier I Imports and specialty grocers Trader Joe's and Henry's Marketplace.
The project, which has a $51.5 million loan from Fremont Investment & Loan for land acquisition and construction financing, is expected to open in March 2007. Sudberry has commitments for about 85 percent of the space at Village Walk.
Also coming on line in 2006 is the 265,000 square-foot 4S Commons Town Center that will open in the fall on 53 acres in the master-planned community of 45 Ranch in northern San Diego.
Jacksonville, FLa.-based Regency Centers is developing 4S Commons at Rancho Bernardo Road and Dove Canyon Road, Tenants include Ralphs, Sav-On, Bed Bath & Beyond, Cost Plus, specialty grocer Jimbo's Naturally and Ace Hardware.
In eastern Chub Vista, Chicago-based real estate investment trust General Growth Properties Inc. is building Otay Ranch Town Center, San Diego County's first regional mall in 20 years.
The first phase totaling 855,000 square feet is scheduled to open OcL 27 on 85 acres at East-Lake Parkway and Olympic Parkway. Within 18 months, another 20 specialty stores and a department store totaling 130,000 square feet to 140,000 square feet are planned.
Tenants in what General Growth prefers to call a lifestyle center include Macy's, a 12 to 14 screen AMC Theatre and 80 shops and restaurants, including P.F. Chang's, the Cheesecake Factory, Barnes & Noble, Anthropologie, Coach and Coldwater Creek.
Sharon McHugh, General Growth's senior leasing agent for the project said the REIT has commitments for about 82 percent of the fIrst phase and the strong demand from national upscale tenants shows the potential for eastern Chula Vista's retail market.
"Ann Taylor is only opening 10 stores in the country next year and one of them is here," McHugh said.
Some retailers, such as Anthropologie, are opening their first or second San Diego-area stores in Otay Ranch Town Center.
"It's the small specialty local guys we're starting to work on now," McHugh said. "The National guys bring people to site, but the smaller shops give it some local flavor."
The project Will be a regional draw because of its size. It is designed to be a gathering place for the eastern Chub Vista master-planned communities of Otay Ranch and EastLake, which are underserved by retail.
"Thirty-five percent of the growth in San Diego County is happening in this market," McHugh said. "There are strong demographics, incomes growth opportunities."
Chula Vista has plenty of room for additional retail, according to Sudberry.
"I think that there's been such a lack of retail, goods and services in this community and a mall's been needed for so many years, it's about time they built it," he said. "We're both still striving to create great gathering places, but the mall's going for more of a regional once or twice-a-month trip where our project is geared to a smaller draw and more repeat business."
Sudberry described Village Walk as an upscale specialty center with restaurants, boutique clothing stores, and other goods and services to serve the local community.
"It's something we see our company doing a lot more of in the future, these upgraded specialty centers, but the demographics and location have to warrant it," Sudberry said.
The developer plans to build a small upscale center this year in the wealthy San Diego neighborhood of La Jolla, involving a Longs Drug and underground parking.
"Since we're running out of land all over, you're going to see mixed-use developments all over San Diego County," said Bill Shrader, senior vice president at Burnham Real Estate and leader of the local brokerage's Urban Retail Team.
Converting the Outdated
Urban-infill developers and investors converting outdated shopping centers in the suburbs are concentrating on housing over street-level shops.
"That's the nature of retail; it's constantly reinventing itself," Shrader said.
Some specialty drug stores have formats in a variety of sizes to fit any urban or suburban location. Also, more small mom-and-pop apparel retailers are opening locations, which hasn't occurred for a while, according to Shrader.
San Diego-based McMillin Commercial plans to begin construction late in the summer of the 140,000 square-foot Sellers Plaza at Liberty Station, a 361-acre mixed-use redevelopment of San Diego's former Naval Training Center in Point Loma. McMillin Commercial's parent company, the Corky McMillin Cos., is the master developer.
San Diego developer C.W. Clark Inc. has started construction of the Marketplace, a 170,000 square-foot neighborhood shopping center in Liberty Station anchored by Vons and Trader Joe's, opening during the first half of 2007.
In Chula Vista, McMillin is building the 104,000 square-foot Shops at San Miguel Ranch at East H Street and Proctor Valley Road. The center, to be anchored by Albertsons, will open in two phases in late October 2006 and March 2007.
General Growth bought the 85 acres for Otay Ranch Town Center from McMillin, which still owns 200 acres south of the lifestyle center where it is master-planning the Eastern Urban Center. The mixed-use development will have 400,000 square feet to 455,000 square feet of retail in three districts, with the first phase opening in 2008.
"San Diego County is one of the most sought-after retail markets, period," said Duncan Budinger, vice president at McMillin Commercial. "I think to a certain degree the market areas are underserved. There are a lot of centers that were built a while back that now have to be reinvented or they go away."
Time to Hold
While low capitalization rates for properties trading hands during the past few years have signaled a good time to sell for redevelopment purposes or otherwise, many retail owners have opted to hold their assets, because any shopping center they buy to replace the sold property would also have low capitalization rates.
"The sellers don't know what they'll trade into, but other people are seeing low capitalization rates and they see it as a time to get out and pay [capital gains taxes] or go into another market," Schiff said.
Capitalization rates are all relative, he said, based on the value buyers think they can add to a properly to justify higher rental rates.
"The last center we sold was at a 6 [percent] capitalization rate," Schiff said. "The buyer thought the property was undermanaged and thought they could use their management expertise to add value since the rents were undermarket."
Perhaps because many owners have decided not to sell or because rents have gained a lot of ground during the past few years, capitalization rates have seen less of a drop for retail assets than for other property types in San Diego County, according to San Francisco-based data provider LoopNet Inc.
From fourth quarter 2004 to fourth quarter 2005, capitalization rates fell from 5.1 percent to 4.6 percent for apartments, from 7.2 percent to 6.8 percent for industrial, from 7.5 percent to 7 percent for office, and from 7.6 percent to 7.3 percent for retail.
Loop.Net also reported for the 12 months ended Dec. 31 that investors spent $2.1 billion on apartments in San Diego County, $.53 billion for industrial property, $2.1 billion for office buildings and only $1.1 billion for shopping centers.
By MANDY JACKSON
CREJ Staff Writer