West Coast Sees Strong Demand
The west coast retail market will continue to remain strong in 2007.
Graham Bryan and Robert Murray

The retail real estate market in the western United States remained strong throughout 2006 with low vacancy rates and low cap rates despite high gas prices, a softening residential market and political unrest overseas. But will this trend continue for 2007?

The rise of interest rates has resulted in lessening of pressure pushing down cap rates in nearly all markets. A little bit of steam is being released from the pot but there is still strong demand for well located, quality retail in secondary and tertiary markets.

Future Challenges Facing Retail Market

There are many challenges facing the retail market that we may see in the future. For example, many of the low interest rate conduit loans, that many owners utilized to increase cash-on-cash returns, loom on the horizon. These owners are going to have to think about what their exit strategy will be. In addition, many of the residential sub-prime borrowers who cannot now refinance, combined with high gas prices, may affect consumer confidence and spending. As consumers back off and purchasing softens, landlords will be challenged to push rental rates up and landlords should focus on keeping occupancy rates up rather than focusing on increasing their net operating income (NOI). Another challenge will hit the investment side. As REITs gobble up REITs and as private equity eats up its fair share of the properties coming to market, combined with the increase in the cost of money, efficiencies already squeezed, and the possibility of a decrease in consumer spending, large institutional owners are going to have to be creative to meet the market demand of increasing profits or accept level returns for the near term.

According to Stuart Tanz, president and CEO of United Income Properties, Inc., there has been little supply of quality shopping center assets in the high density, high income markets on the west coast. He also stated that this trend has kept cap rates at historic lows for retail real estate.

West Coast Retail Real Estate Stats

San Diego continues to have high occupancy rates and rents, with little new construction in the pipeline. A San Diego County average vacancy rate of less than 2 percent is impressive as rents and sales prices remain high. Even with a slight rise in both vacancy rates and cap rates, Orange County remains strong with new growth as developers deliver new retail space to the market in 2007. Los Angeles vacancy rates dropped slightly, rents rose slightly and cap rates remained steady at 6 percent. Inland Empire’s strong demographics and more spendable income will mean good news for high-end retailers.

The Sacramento market absorbed over a million square feet in 2006 and there is currently close to 3 million square feet of new retail construction currently underway. The Bay Area retail markets continue to command some of the highest rents in the nation. Retail sales in the Northwest are increasing for both upscale and discount retailers, which is a common trend in other affluent regions. Wal-Mart and Costco will continue to attract consumers, as will lifestyle centers and high-end retailers. Las Vegas’ growth continues as unemployment in the region (4 percent) remains below the national average. New hotels and casinos are creating more jobs and bring more revenue to the region. Phoenix, Tucson, Denver, Colorado Springs, Portland, Seattle, Bremerton and many more metropolitan areas show signs of continued strength and interest to investors.

Based in the San Diego-UTC office of Lee & Associates, Robert Murray, principal, and Grant Bryan, principal, specialize in the San Diego retail market.

San Diego Performance Exemplifies Market There have been a significant number of shopping center sales and new developments in 2006 and to date in 2007 in the San Diego market. The activity covers a wide spectrum of the San Diego County from the Oceanside Highway 76 corridor on the North to the Mexican Border on the South. Coastal communities on the west experienced significant activity and new development continues to the East in Santee. Some of the larger developments completed or in the process of construction include: North County The Grand Plaza is a 350,000-square-foot center about to open in San Marcos area just south of Highway 78 on Los Posas Road. Major tenants include Bed Bath & Beyond, Loehmans, Nordstrom Rack, Marshalls and Sprouts Farmers Market. Major restaurants including the Elephant Bar, Chili’s and Pat & Oscars will be opening soon. The 4S Commons Town Center is a 265,000-square-foot shopping center located within the 4S Ranch community. This development is located just west of Ranch Bernardo at Rancho Bernardo Road and Camino Del Norte and is estimated to have 4,700 homes and 10,000 residents by 2009. The center is anchored by Ralphs Fresh Fare Grocery, Jimbo’s Health Foods and Bed Bath & Beyond. Other projects in the North County, which are still in the planning stages, include a proposed 800,000-square-foot center to be called the Pavilion at Oceanside. The project is located at the site of the old Valley Drive-In movie theater on Mission Avenue in the San Luis Rey Valley. There is a proposed hotel, movie theaters, supermarket and discount store such as Target under consideration but no leases have been signed. Construction is scheduled for 2008 if the Oceanside Planning Commission and city council give their approval. Westfield North County, previously known as North County Fair, is planning an expansion. The center currently sits on 82.7 acres and has 1.22 million square feet of shopping space. The proposed additions would increase that total by 445,000 square feet and could allow the addition of a hotel, discount department store and expansion of existing stores. Current anchors include Nordstrom’s, Macy’s, JC Penney and Sears. Mid City And Point Loma Downtown San Diego continues to be in the constant state of new construction including the Gas Lamp, East Village, Petco Park, Little Italy and the Embarcadero areas. This entire area is undergoing a new development of hotels and mixed-use buildings with retail on the first floor and condominiums above. The East Village and Petco Park, home of the San Diego Padres, have generated millions of visitors to the area, which created the demand for new hotels such as the San Diego Marriott Gas Lamp Quarter Hotel. The Hard Rock hotel/condominium is currently under construction along with other upscale residential condos. There are approximately 100 projects being reviewed by the City of San Diego’s CCDC. Some are in the planning stages and others are near completion. Another major project in its final stages of development is Liberty Station, site of the previous San Diego Naval Training Station. This approximate 361- acre development is located in the Point Loma area North of Harbor Drive and West of Lindberg Field. There are many components to this redevelopment project including three separate residential neighborhoods, office buildings and a section designated as Liberty Station Resort Village. There is also a nine-hole golf course. The retail component in this market is a 160,000-square-foot center known as Marketplace at Liberty Station. Major tenants include Trader Joe’s, Sammy’s Wood Fried Pizza, Panera Bread, Starbucks, Postal Annex and Navy Federal Credit Union. South Bay Otay Ranch Town Center is a new lifestyle center in the community of Eastlake in Eastern Chula Vista. The center is San Diego County’s largest new retail development since North County Fair and Horton Plaza were built in the 1980s. Major tenants include Macy’s, Barnes & Noble, AMC 12-screen theater and major restaurants include The Cheesecake Factory, California Pizza Kitchen, and P.F. Chang’s China Bistro. Over 100 stores and restaurants are planned for the center as well as a dog park, water fountains and a large outdoor fireplace. East County The Santee Town Center is a 706-acre, master-planned mixed-use development in the heart of Santee. The latest project to open is the Santee Trolley Square which is opposite of the Santee Plaza/ Promenade anchored by Wall-Mart, Costco and Home Depot. Santee Trolley Square’s anchor tenants include Target, TJ Max, Bed, Bath & Beyond, Old Navy, Staples and Pets Mart. Dining facilities include Olive Garden, Chili’s, Mimi’s Café and a food court. There is also a 250-seat outdoor public amphitheater and a planned Santee Library. —  Larry Bogle is San Diego shopping center specialist with Lee & Associates’ San Diego-UTC office.

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