Retail Rates Hit Record Highs

San Diego retail rates climbed to record heights in the second quarter, according to new research from CBRE. Asking rates were up $0.13 to $2.39. Leasing activity was behind the boost in rental rates. There was 645,341 square feet of retail leases signed in the second quarter, an increase of 14.6% over the first quarter. Despite the strong leasing activity and rise in rental rates, retail absorption was a negative 83,225 square feet, bringing year to date absorption to a negative 97,327 square feet year-to-date with a 7% vacancy rate. This dynamic illustrates the bifurcation in the market between quality, class-A and well-located space and class-c and class-d spaces in poorer locations.

“We have seen a lot of quality spaces come back to the market over the last year, and the second quarter was a time and place when those quality locations got rented,” Joe Yetter, first VP at CBRE, tells GlobeSt.com. “In the second quarter, we saw a lot of those locations filled at rental rates that are a premium for today’s market because the units were in A-grade shopping centers in good parts of the city. That dynamic has driven the rents up, an in a lot of these cases landlords are excited to get the units back because there are few quality boxes in those markets, and they can increase the rents.”

Backfill leases accounted for the majority of the leasing activity in the quarter, rather than the leasing of vacancy spaces. Landlords with quality space, well-located spaces are able to drive rents up and sign quality tenants. These increases have produced a higher average asking rate. “Landlords are able to push rents in the better markets, but there are markets in San Diego where landlords are trying to give retail space away to $1.00 to $1.25 per square foot. In some places, the market has too much retail space,” says Yetter. “The average rental rate is being driven by much higher rents in more desirable locations. C- and D-locations are still trying to capture the same rents that they were 10 years ago.”

Landlords with less-desirable locations need to be more aggressive and open to fill vacancy spaces, and much of the current vacancies live in these locations. “Landlords need to be more aggressive than they want to be,” adds Yetter. “That means offering free rent or bring the rental rate down to where it is palatable. That is particularly true if it is a decent tenant.”

Despite the bifurcation in the market, San Diego’s retail market is very healthy, and Yetter expects the market to remain stable through the end of the year with well-located retail performing well and retail in poorer locations struggling. “The County is really healthy. Tenants want to be in San Diego, and that is what is fueling the backfill of these locations,” he says. “Generally tenants that are failing and going away are in pretty good locations. They are backfilled pretty easily, especially considering there is limited new development and limited availability. The opportunities for retailers are slim, and that drives rents and keeps the vacancy rate low.”