Hi everyone.
Frequent reader, infrequent poster, but bucking the trend with an interesting article from San Diego Metropolitan's Daily Business Report about retail absorption in downtown S.D. Long story short, retail expansion is slowing temporarily due to the slowing housing market, but long-term outlook is positive with lots of new hotel rooms on the horizon and a steady backlog of condo projects.
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The completion of 425,000 square feet of new commercial retail space over the past 12 months -- along with the postponement of several planned mixed-use redevelopment projects -- have contributed to Downtowns first negative retail absorption since at least 2001, reports Burnham Urban Retail Group. That was the year Burnham first started studying the Downtown commercial market.
The Burnham report shows that as of Aug. 31, the Downtown retail market had -88,472 square feet of net absorption. This compares to the same time a year ago when net absorption was 39,428 square feet.
"Available retail inventory in downtown San Diego has increased due to the near simultaneous completion of over 400,000 square feet new space," says Bill Shrader, senior v.p. and principal with Burnham Urban Retail Group. "Additionally, the pause in the construction of several condominium projects has returned some existing retail space to the market, which is adding to the vacancy rate."
Shrader noted that it is because retailers in general see tremendous long-term opportunity Downtown that many are putting off their decision to operate Downtown until new or planned projects are complete. "Retailers recognize that San Diego is successfully transforming into a thriving 24/7 urban center. More importantly, they recognize that the slowdown in new residential construction is temporary and they want to be ready to move quickly once development resumes," he says.
Adding to the stability of the Downtown retail market is the nearly 2,500 new hotel rooms that are being added to the market over the next 24 months. Hotels under construction include the soon-to-be completed 420-room Hard Rock Hotel in Gaslamp Quarter, 1,200-room Hilton Convention Center Hotel, and a 239-room Residence Inn. The 210-room Hotel Indigo will break ground in the Ballpark District within the next three months and will be followed by a 344-room Marriott Renaissance Hotel in Gaslamp in 2008. Additionally, Marriott has announced plans for an additional 1,650-room hotel just east of Petco Park.
"In essence, Downtowns next wave of construction is new hotel development to serve San Diegos growing tourism and convention industry," says Corinna Gattasso, v.p. and co-founder of Burnham Urban Retail Group. "Retailers recognize the sales potential from the increased spending money visitors bring with them."
Retailers also will continue to benefit from renewed office development Downtown. Cisterras DiamondView Tower is 90 percent leased, and American Equities Plaza (developed by Lankford) is 85 percent leased. On the horizon is a 685,000-square-foot office tower planned by The Irvine Co. that will break ground soon at Broadway and Kettner."The residential, hotel and office growth Downtown has created the right mix of use and the synergy to support a thriving retail environment," says Gattasso.
Planned and under construction retail space currently totals 575,291 square feet, 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 2005 when there were 1,129,341 square feet of new space planned or under construction, 64 percent of which was located in the East Village area near Petco Park.
"The market will steadily absorb the current supply of available space, particularly with the temporary slowdown in new construction," says Shrader.
The Burnham study says there are 5,005,561 square feet of retail inventory in Downtown. This is up from total inventory of 4,575,607 in 2006, an increase that is due in part to 200,000 square feet of new space that came on line in the East Village/Ballpark District alone.
Currently, 397,212 square feet of Downtown retail space is unoccupied, for a 7.9 percent vacancy rate. This is up from the same time in 2006, when vacancy was 6.6 percent. Net absorption in 2006 totaled 39,428 square feet, the Burnham report shows.
Gattasso says Downtown continues to attract quality retail tenants, especially restaurants who are eager to capitalize on the thousands of 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. "Bice is returning to Downtown 10 years after it opened in the ill-fated Paladian project in the early 90s," Shrader says. "The market has grown tremendously and Bice is very excited to be part of the Downtown market, which has an outstanding long-term outlook."
Additionally, Donovans Steakhouse -- which has been looking for a Downtown location for several years -- will be opening in the former Trophys location at Sixth Avenue and K Street.
The Burnham study shows that East Village/Ballpark District accounted for most of the year-to-date negative absorption with -76,515 square feet. Little Italy was next, with -15,782 square feet, followed by Cortez Hill, with -14,550 square feet. The highest positive absorption reported Downtown occurred in the Columbia district, with 9,287 square feet. It was followed by the Marina District with 8,550 square feet and the Gaslamp, with 5,919 square feet.
Cortez Hill reports 20.4 percent retail vacancy, followed by East Village at 18.1 percent, and the central core at 10 percent. The lowest retail vacancy rates are reported by Horton, with just 1.8 percent vacancy, the Marina District with 3.2 percent vacancy, and the Gaslamp with 3.4 percent vacancy.
"2008 will be a year to absorb space, particularly the new inventory in the Ballpark District," Shrader says. "We fully expect the vacancy factor to go down significantly over the next year as existing space leases up and nowhere near as much new space is delivered. Long term, this bodes well for retailers and investors alike."
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