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4/21/08
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For the first time since downtown San Diego’s revitalization into a thriving 24/7 urban center began eight years ago, the popular central business district has recorded negative retail absorption. This review of the retail market in the area is based on Cushman & Wakefield’s 2008 San Diego Outlook report and will give you a better of how the market is changing. It was provided to us by the international real estate services firm.
According to C&W’s report, the near simultaneous completion of 425k sf of new space, along with the pause in construction of several mixed-use condominium projects that returned some retail space to the market, is responsible for the decline. Current downtown retail vacancy of 7.9 percent is up from 6.6 percent a year ago.
“The decline in net retail absorption is due to the fact that retailers recognize that the slowdown in residential construction is temporary and are postponing their plans to locate downtown until new or planned mixed-use projects are complete,” said Bill Shrader, Senior Director with Cushman & Wakefield’s Urban Property Group.”
Retailers are also anticipating the potential that a new wave of hotel development will soon bring to the market. Approximately 2,500 hotel rooms are being added downtown over the next 24 months, beginning with the recently completed 420-room Hard Rock Hotel and continuing with the 1,200-room Hilton Convention Center Hotel, a 239-room Residence Inn and 210-room Hotel Indigo, all of which are under construction. A 344-room Marriott Renaissance Hotel in Gaslamp Quarter will break ground later this year, and Marriott has announced plans for an additional 1,650-room hotel just east of PETCO Park.
“In essence, downtown’s next wave of construction is new hotel development to serve San Diego’s growing tourism and convention industry,” said Corinna Gattasso, Director with Cushman & Wakefield’s Urban Property Group. “Retailers recognize the sales potential from the increased spending money visitors will bring with them.”
Downtown San Diego continues to attract quality retail tenants, especially restaurants who are eager to capitalize on the thousands of new hotel rooms, new residents and workers in the central district areas. These include Bice Restaurant, which will be opening in Gaslamp Square at the corner of Fourth and Island in the second quarter of 2008.
Gattasso added that they are also seeing an influx of premier regional and national tenants that see downtown San Diego as an opportune place to open additional locations. These include the Tilted Kilt, which opened in DiamondView Tower in March 2008; San Diego Beer Company (modeled after Huntington Beach Beer Company), which will open in the Fletcher-Salmons building in fall 2008; Club Sushi, opening at the Samuel Fox building in early fall 2008; as well as two Hard Rock Hotel retail tenants: Nobu, which opened in early 2008 and Pinkberry, scheduled to open in summer 2008.
There also is a new wave of traditional tenants adapting their uses to a downtown setting. Tesco, which, started its Fresh and Easy concept in the suburbs, is now scouting for an urban store to serve the fast-growing downtown residential base and other Tesco competitors are following suit. Long's, CVS and Rite Aid all have urban concepts that are different than their suburban locations and we expect more to follow.
The Cushman & Wakefield report shows that retailers will continue to benefit from renewed office development downtown. Cisterra’s Diamond View Tower is 93 percent leased, and American Equities Plaza (developed by Lankford) is 85 percent leased.
Planned and under construction retail space currently totals 575.3k sf, 75 percent of which is a multi-level power center planned for development on the former Unocal site adjacent to PETCO Park. This compares to two years ago when there were 1.13 msf of new space planned or under construction, 64 percent of which was located in the East Village area.
“Looking ahead, 2008 will be a year to absorb space,” said Shrader. “As existing space leases up, the vacancy factor will decrease significantly, particularly with nowhere near as much space being delivered as during the past couple of years. Long term, this bodes well for retailers and investors alike.”
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