In the News 2008
Low Vacancy, Limited Building Help San Diego Retail.
February 11, 2008
Housing-related stores empty some space but tenant demand remains for key locations
Despite weakness in the housing market that has hurt some retailers and increased vacancy, San Diego County shopping centers are expected to fare well in 2008.
Brokers and shopping center developers believe that vacancies should remain low since there is little new construction and there is still demand from tenants that don't sell mortgages, furniture or hardware. But like other property types, retail investment will probably be off from 2007 levels due to the ongoing credit crunch.
Bruce Schiff of Grubb & Ellis|BRE Commercial in Carlsbad said smaller mom-and-pop businesses are vacating space and fewer new shops are opening due to the housing market slowdown. Individuals have less equity built up in their homes than they did a few years ago, so they cannot extract as much cash by refinancing their houses to start new retail businesses or to shop at furniture or home-improvement stores.
However, major national retailers are still looking for space. "They're being more cautious about where they're going, but they're still out in the market looking for good deals," Schiff said. "Tesco's out actively looking to expand and new Wal-Mart concepts are out looking to expand. There are a number of deals that haven't been announced yet that are in process."
Colton Sudberry, senior vice president at San Diego-based Sudberry Properties Inc., said real estate-related tenants stopped expanding in 2007 because of the housing downturn, so vacancies will increase a bit in 2008.
Sudberry doesn't expect other types of tenants to have problems taking on new locations this year, but he said shopping centers on the fringe of San Diego County's developed areas are more likely to see a lack of demand until housing growth picks up.
"In the majority of centers, the sales volumes have remained steady," Sudberry said. "I think everyone's keeping a close eye on consumer confidence and the credit crunch and how that will shake out in 2008. We're seeing core centers perform well. As soon as there's a vacancy, we fill it right away."
In its fourth-quarter report, Grubb & Ells|BRE found that strong absorption and rent increases continued late last year in coastal submarkets and high-growth areas, such as downtown San Diego, Chula Vista, San Marcos and Rancho Bernardo. Market conditions softened in other areas, including Escondido and National City.
Grubb & E1lis|BRE reported a countywide vacancy rate of 3.1 percent in fourth-quarter 2007, up from 2.2 percent in the second quarter and 1.8 percent in fourth-quarter 2006. Vacancy is expected to slowly increase in 2008, but remain below 5 percent.
Tenant Demand
Tony Villasenor, principal at Lee & Associates in San Diego, said retailers are being more decisive and selective about where they locate new stores in San Diego County.
"A lot of these retailers, like Starbucks, Wal-Mart and the grocery business in general, have been on a very aggressive growth campaign," Villasenor said. "Now they're just doing their regular growth. They're taking a surgical approach to opening new stores."
He noted that Starbucks probably will open 400 U.S. stores this year, and though the coffee chain opened 1,000 stores domestically in 2007, a slower growth rate in 2008 doesn't mean the company is in trouble. Other chains are also modifying their growth plans, but with smaller stores, not necessarily fewer stores.
"The grocery stores got into a situation where they were competing against Wal-Mart and now Wal-Mart's adjusted (to new competition)," Villasenor said. "They're doing 10,000 square-foot stores. They have already signed leases in San Diego for 10,000 feet."
Wal-Mart is following the lead of British grocery chain Tesco, which is opening multiple Fresh & Easy stores in San Diego County that are a fraction of the size of traditional 40,000 square-foot grocery formats embraced by Ra]phs, Vons and Albertsons.
Villasenor said drug store chains, including Walgreens, and other retailers are also considering smaller footprints because of the cost of San Diego real estate and limited number of new shopping centers in the county.
Retail rents have increased 14.2 percent in San Diego County during the past three years, according to CB Richard Ellis. The brokerage reported that average rental rates rose last year from $2.13 per square foot per month in the first quarter to $2.18 in the fourth quarter. Rents are expected to level off or show slight increases in 2008.
"Retailers are adjusting their footprints to make deals make sense in areas like San Diego," Villasenor said. "That's why I think we will continue to have low vacancy rates in San Diego. The barriers to entry are so high that retailers will continue to do good business."
Construction Trends
With low vacancy and little new construction retailers have few choices in San Diego County to fulfill their expansion plans. According to CB Richard Ellis, there was 654,000 square feet of new retail space under construction in San Diego County, Murrieta and Temecula in fourth-quarter 2007, up from 1.3 million square feet at the beginning of last year. In fourth-quarter 2006, there was 2.5 million square feet under way.
Craig W. Clark, president of San Diego-based commercial real estate development firm C.W. Clark Inc., said his company has had to develop sites in the Inland Empire, desert communities and Arizona due in large part to the lack of land entitled for retail space in San Diego County. C.W. Clark is looking at more infill sites to stay closer to home.
"A lot of what we're going to see is the tougher sites with environmental problems or redevelopment of existing centers," Clark said. "We're looking at trying to find excess land that somebody is willing to let go that they weren't willing to let go six months ago. If you're going to do business in San Diego you're going to have to recycle sites."
C.W. Clark finished the majority of its 160,000 square-foot Marketplace at Liberty Station in late 2007, with tenants including Vons, Trader Joe's and Starbucks. The project involved rehabilitation of historic structures within the Liberty Station master-planned community on the former Naval Training Center in San Diego's Point Loma neighborhood.
This year C.W. CLark is gearing up for several mixed-use projects, including an infill project at Clairemont Drive and Marina Boulevard in San Diego next to the company's 101-room Best Western Mission Bay. The developer has owned the hotel for a year and a half and has held an interest in the land beneath the Best Western and 33,000 square feet of retail next door with the Bruce Burgener family for seven years.
The existing retail will be replaced with the 68,000 square-foot Bay View Plaza. with a restaurant, Starbucks, drug store, specialty market, a bank, additional shops and a larger restaurant or small office building. Clark hopes that his company can begin construction on May 1 after the project's Planning Commission hearing in March and San Diego City Council consideration in April.
North of San Diego in the city of San Marcos, C.W. Clark has entitled a project and may begin construction in the summer on a 22-acre site at Twin Oaks Valley Road and San Marcos Boulevard off state Route 78. About 50,000 square feet of retail is planned, including a grocery store, drugstore and shop space, along with two office buildings totaling 88,000 square feet.
Sudberry Properties has a mix of traditional suburban retail centers and infill projects under way. The firm opened its 162,000 square-foot Village Walk at EastLake in eastern Chula Vista in September with Henry's Marketplace, Trader Joe's and Borders.
This year, Sudberry is building Santee Marketplace, a 71,000-square-foot center anchored by Henry's in the East County city of Santee. In September, the developer will complete a Longs Drug store in the Bird Rock area of La Jolla on San Diego's coast.
Colton Sudberry said the company has three other projects in predevelopment in San Diego, but the entitlement process is ongoing and the construction dates are uncertain. One is an open-air shopping center anchored by a gourmet market off Interstate 15 in northern San Diego. Another is a 27-acre power center in south San Diego.
The third project in predevelopment is another open-air, gourmet market-anchored center, which is slated for Sudberry's 230-acre Quarry Falls master-planned community in Mission Valley, a central San Diego submarket.
Very little new development in the North County area is coming on line or getting under way in 2008. Projects in the entitlement process are a year or two from construction.
Locally based Aspen Properties is planning a 275,000 square-foot project called La Costa Town Square at Rancho Santa Fe Road and La Costa Avenue in Carlsbad, which may break ground before year-end.
On 85 acres along state Route 76 between Foust and Mission roads in Oceanside, Georgia-based Thomas Enterprises is planning 850,000 square feet of retail, including upscale and big-box stores, a theater, restaurants and a health club, but the developer is unlikely to begin construction before 2009.
Australian mall owner Westfield Group anticipates breaking ground in 2009 on a $900 million, 750,000 square-foot expansion and revitalization of its 1 million-square-foot Westfield UTC mall in the University Towne Centre area of San Diego. The project includes a 250-unit residential tower, 3,000 new parking spaces and a transit center. If it breaks ground next year, the expansion will open in two phases in 2011 and 2013.
In the South County, Westfield will complete its $90 million, 300,000 square-foot expansion of Plaza Bonita in National City this year. The. project will bring the enclosed mail to more than 1 million square feet with the addition of a 140,000 square-foot Target store, a 14-screen movie theater, a new food court, additional restaurants, a 25,000 square-foot Borders bookstore and space for 40 small shops.
Limited investment
On the investment side of San Diego County's retail market, activity was a fraction of the level seen for office, industrial and apartment acquisitions in 2007. Investors spent $852.8 million on retail assets last year, up from $605.4 million in 2006, according to New York-based Real Capital Analytics. Despite the jump in spending, it paled in comparison to multibillion dollar figures for office, industrial and apartment assets in 2007.
Schiff of Grubb & Ellis|BRE said 2007 was a good year for retail investment in San Diego County, but by the end of the year the credit crunch impacted the ability of buyers to acquire shopping centers at the same prices they paid in early 2007.
"There is not an equilibrium between buyers' and sellers' expectations," Schiff said. "People that haven't sold but want to sell think they have very low cap rate deals still, but buyers want higher cap rate deals."
Fourth-quarter retail investment activity of $94.1 million was less than half of $209.7 million invested in fourth-quarter 2006, according to Real Capital Analytics.
Until interest rates drop below 200 basis points over the 10-year Treasury, Villasenor of Lee & Associates said there won't be much investment activity in the retail market.
"The lender market is impacting people's ability to buy property right now," he said. "There are a lot of lenders that are simply out of the market."
Economic Impact
Carl Steidtmann, chief economist for Deloitte Research said during a Jan. 24 Deloitte & Touche LLP Webcast regarding the consumer outlook that the nature of the economic recession he is expecting in 2008 will be relatively mild compared to past recessions, but it could be lengthy due to trouble in the financial markets.
Steidtmann said banks have written off about $120 billion in bad debt due to subprime residential mortgage losses so far and more write-offs are expected this year as banks get a better picture of their exposure in the subprime market.
"It will be some time before they can write off all their bad debt," he said. "It has the potential of stringing out this recession arid making it longer."
At the consumer level, individuals and families experienced an explosion in net worth creation during the past five years due to rising stock prices and home values.
"Consumers didn't have to go out and save so we saw saving rates plummet to almost zero," he said. "All of this is going to go in reverse and the question is how it will impact consumer spending."
Steidtmann said retailers are not likely to see a big boost from Congress' economic stimulus plan, which will give tax rebates of up to $600 to individuals, $1,200 to couples and $300 for each child in a household. Studies of the last two tax rebates to stimulate the economy in 2001 and 1975 found that the bulk of the money was used to pay off debt or deposited into savings accounts.
While retailers did pretty well in San Diego County last year and they expect sales to hold steady in 2008, George Whalin of San Marcos based Retail Management Consultants agreed that the tax rebates are unlikely to have a major impact on local consumer spending.
Since the U.S. unemployment rate remains low, the possibility of a recession is questionable, Whalin said. But conflicting messages regarding home sales, job growth, the stock market and other indicators will hurt consumer confidence this year.
"When they see enough talk about a recession and they see the president talking about a stimulus package to stop a recession, they stop spending," Whalin said.
The International Council of Shopping Centers reported that U.S. retail sales ended 2007 on a soft note. The holiday shopping season posted a year-over-year gain of 2.2 percent, which was the slowest rate of same-store sales growth since 2002.
BY MANDY JACKSON
California Real Estate Journal Staff Writer