Retail rent up across County
Costs have increased 4.6% over last year, faster than national benchmark, and are hitting highest level in a decade for San Diego region
By Natallie Rocha
I t’s no surprise that rents are going up in San Diego County. It’s not only getting more expensive for San Diegans seeking housing — businesses are paying more to rent retail spaces than they were a year ago.
Across the county, retail rents — think malls, shopping centers, storefronts — have grown 4.6 percent year over year, according to real estate tracker CoStar. It’s growing faster than the national benchmark and recently, San Diego’s annual retail rent growth hit its highest level in a decade.
During the second quarter, San Diego’s retail rent growth peaked at 5.8 percent.
The increase is primarily driven by low availability of retail space and virtually no new construction, said Joshua Ohl, research director at CoStar. While available space is on the upswing from an all-time low at the end of 2022, it’s still near a historic low. San Diego County’s vacancy rate is slightly lower than this time last year at 4.1 percent.
“I think San Diego’s already coming from a point where we had one of the lowest retail square footages per capita in the country among major markets,” Ohl said. “So, there’s just few spaces out there for tenants and they have to compete for space. Landlords just have a lot of leverage in that type of environment.”
Like anything in real estate, it’s about supply and demand, said Nate Benedetto, principal at Next Wave Commercial, a local firm that represents tenants, landlords and handles real estate sales across the county. Benedetto, who works with specialty restaurants and emerging retailers, said he’s seen demand for space from businesses wanting to enter the San Diego market and local entrepreneurs trying to grow their footprint.
“We have a fair amount of new construction of mixed-use retail in the urban markets but the suburban markets (and) the coastal markets are pretty well built out,” Benedetto said. “You have not very many restaurants and retailers calling it quits and you have new entrepreneurs that want to be there, so it creates a supply-constrained environment.”
He added that retail rents aren’t going to trend downward or stabilize so long as vacancy rates continue to stay low.
Another factor behind more premium rents is tenant improvement money, Benedetto said, which goes toward upgrading the features of a space. Since new construction is so costly, he’s seen more tenant improvement money being offered by landlords.
“When you offer more tenant improvement money, it does allow for higher rent and that kind of tracks hand in hand,” he said. “So, I think that’s also a factor where you’re seeing more leasing incentives or higher tenant improvement (budgets) from many landlords and that can help landlords achieve higher rental rates.”
Redevelopment of retail space is another factor. Ohl explained that there are instances where retail space is being taken off the market and converted into other uses, like housing.
For example, Dixieline Lumber, a roughly 50,000-square-foot location on Convoy was demolished at the end of last year. It’s being redeveloped into more than 500 Kearny Mesa apartments .
“We’ve taken more out of inventory than we’ve added over the past five years,” Ohl said.
As space becomes more expensive some retailers may shift to smaller locations that focus on services and emphasize goods less, Ohl said. Instead of having a 50,000-square-foot space, a store may opt for a fraction of that so shoppers can see a few items and then order online.
While retail rents have only gone up across the county, they’ve gone up the least in neighborhoods such as central San Diego (2.4 percent), Imperial Beach and South San Diego (2.8 percent) and Lakeside (3.0 percent).
As of mid-September, here’s where rent has increased the most for retail establishments in San Diego County over the past 12 months in descending order:
La Jolla/Torrey Pines
Market rent growth: 6.4 percent
Market rent: $4.65 per square foot
La Jolla and Torrey Pines, which include neighborhood centers like La Jolla Village Square and storefronts near La Jolla Shores, saw the largest market rent growth in the county. It also had the second most expensive market rent in the region.
This neighborhood that extends from the coast to the I-5 freeway had a vacancy rate of 4.4 percent.
Mission Valley
Market rent growth: 6.3 percent
Market rent: $4.40 per square foot
Mission Valley stretches along the San Diego River and I-8 West freeway and had the second-lowest vacancy rate in the county, 0.9 percent. The neighborhood includes the Westfield Mission Valley shopping centers, which were sold for $290 million in July .
Mission Valley also had the fifth-largest retail lease signed in the past 12 months — Jimbo’s Naturally has leased 25,000 square feet of space in The Row at Civita, a mixed-use development within a 230-acre master-planned community of homes and apartments.
UTC
Market rent growth: 6.3 percent
Market rent: $4.46 per square foot
UTC, or University Town Center, covers the area between the I-5 freeway, I-805 freeway, and State Highway 52 West. Not far from the University of California San Diego, there are a number of neighborhood shopping centers as well as the upscale outdoor mall, Westfield UTC, near the trolley station.
It had the region’s third most expensive market rent. The vacancy rate is 8.3 percent — the highest in San Diego County.
Coronado
Market rent growth: 6.2 percent
Market rent: $3.77 per square foot
In addition to housing Naval Air Station North Island, Coronado has neighborhood retail centers including a lineup of various stores along Orange Avenue. Coronado had the county’s lowest vacancy rate at 0.4 percent.
In May, Coronado Plaza, a 42,000-square-foot retail and office center across from the Hotel del Coronado, was sold for $40 million. The property had only one small vacancy at the time of the sale and has maintained high occupancy, according to CoStar. It was the fourth-largest sale in the county over the past 12 months.
Carmel Mountain Ranch
Market rent growth: 6.2 percent
Market rent: $3.91 per square foot
Carmel Mountain Ranch hugs the east side of the I-15 freeway from Lake Hodges down to Poway Road, according to CoStar. The primarily residential area features a number of neighborhood shopping centers with local shops and anchored by grocery stores, like the Carmel Mountain Ranch Town Center.
The vacancy rate was 3.2 percent.
Cardiff/Encinitas
Market rent growth: 6.0 percent
Market rent: $3.65 per square foot
The north coastal area of Cardiff and Encinitas includes a slew of storefronts along the historic Highway 101 as well as shopping centers with grocery stores and retailers like Target east of the I-5 freeway.
This neighborhood region had the fifth-lowest vacancy rate in the county at 2.1 percent.
Eastlake
Market rent growth: 5.9 percent
Market rent: $3.08 per square foot
Eastlake encompasses parts of east Chula Vista along state Route 125 and Otay Ranch, according to CoStar. In recent years, the area has seen growth in residential developments, which are near existing shopping centers like Otay Ranch Town Center in Chula Vista. One of the newest mixed-use developments is The Mix at Millenia shopping center in Chula Vista, which is set to be complete later this year.
Eastlake’s vacancy rate is 2.6 percent.
Del Mar/Solana Beach/Rancho Santa Fe
Market rent growth: 5.4 percent
Market rent: $4.72 per square foot
The North County neighborhoods of Del Mar, Solana Beach and Rancho Santa Fe extend from the coast to east of the I-5 freeway and Manchester Avenue down to Sorrento Valley Boulevard, according to CoStar. This area has the most expensive market rent in San Diego County. From neighborhood shopping centers that accommodate the predominantly suburban residential communities, there are also newer developments like One Paseo and the nearby Sky Deck at Del Mar Highlands Town Center, that serve surrounding office hubs.
The vacancy rate is 4.4 percent.
Poway
Market rent growth: 5.4 percent
Market rent: $2.89 per square foot
The Poway retail neighborhood is east of the I-15 freeway and includes neighborhood shopping centers, like Poway Town Center, with grocery stores, movie theaters, and retailers such as Target. While new construction is rare in San Diego County, Poway has a residential mixed-use project just under 5,000 square feet planned at 12845 Poway Road.
Poway’s vacancy rate is 3.1 percent.
Rancho Peñasquitos
Market rent growth: 5.4 percent
Market rent: $3.47 per square foot
Rancho Peñasquitos covers the area west of the I-15 freeway with State Highway 56 running through the middle, according to CoStar. This largely residential community features neighborhood shopping centers such as Rancho Peñasquitos Town Center with local shops and grocery stores.
Rancho Peñasquitos’ vacancy rate is on the higher end for the San Diego region at 5.3 percent.
natallie.rocha@sduniontribune.com
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