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News release

LAS VEGAS & SAN DIEGO

Rent Growth Returning to U.S. Retail Real Estate Markets in 2013

Rates expected to stay flat in San Diego due in part to lack of Class A core property availability


LAS VEGAS (RECon) & SAN DIEGO, June 24, 2013 — Like digging a ditch with a spoon, retail demand driven by population growth has eaten away at the supply of available store space in the markets that have been slowest to recover from the downturn. It has been a long row to hoe, but vacancy rates are reaching a point that will give at least some landlords in every market the clout to demand slightly higher rents.

San Diego’s retail real estate market fared better than many during the downturn years due to its diverse economy and limited land availability. As a result, now that the economy is recovering, the opportunities for rent growth are much more limited than other markets, especially those that have become over-developed like nearby Riverside and San Bernardino Counties.

“Even though we’re seeing an increase in asking rents in some of our high demand submarkets, including Carmel Valley, Carlsbad and Mission Valley, it’s not enough to create overall rent growth for our county,” said Bryan Cunningham, Vice President in Jones Lang LaSalle’s Retail group.

Conversely, though not yet the overall trend for the nation, “Quite a few markets are already posting year-over-year growth, including Miami, Fort Lauderdale, Dallas, New York, Tampa, San Francisco, Hawaii, Los Angeles and Boston.” said Greg Maloney, President and Chief Executive Officer, Jones Lang LaSalle Retail Group. 

Most of the rent-growth metros are enjoying robust local economies, many driven by energy or high-tech employment. Houston will soon join the list, although it has yet to achieve year-over-year rent growth.

Maloney added, “It’s important to note that many of the markets that are experiencing robust growth are also the ones that had the steepest decline.”
Though it was spared the steep decline of many other markets, San Diego faces the challenge of not being able to offer the right kind of vacancy to capture growth in the near-term.

“Demand from national and regional chains, especially restaurants, will drive retail growth in the near future. We can’t offer enough of the Class A, core properties that all of these users want because a lot of the high profile real estate has been absorbed,” said Cunningham. Deliveries of newly constructed space must increase to make this happen, and Cunningham estimates that it may be 2016 before rental rates return to their previous peak.

The retail players who have been driving San Diego’s retail real estate activity are primarily membership gyms and specialty grocers.

“San Diego is a very health-conscious town,” said Cunningham, who believes this contributes to the strength of both of these retail types. “Also, gyms, especially, have been able to adapt to the big box spaces that have come available, and they benefit from San Diego residents’ appetites for less expensive entertainment, which in this town includes working out.”

Of note in the San Diego retail development pipeline is La Costa Town Center at Rancho Santa Fe Road and La Costa Avenue, the retail portion of which will be anchored by a Vons grocery store and is expected to be complete in the summer of 2014. Additionally, Sudberry has announced its plans to build Palomar Airport Commons at Palomar Airport Road and El Camino Real in Carlsbad, which will be anchored by Lowe’s.

Overall retail vacancy in San Diego stands at 4.6 percent, decreasing 70 basis points year-over-year. Average rent is at $21.15 per square foot, and net absorption during the first quarter of the year was 242,740 square feet.

National averages
National averages show rents still on the decline, falling a scant 0.2 percent from a year ago, according to Jones Lang LaSalle’s United States Spring Retail Forecast. Yet rents overall were up 0.3 percent from the previous quarter, providing an early glimmer of a more widespread turnaround.

Outlets are in
Increased consumer interest in value retail has already fueled sales and growing store counts for many retailers that specialize in do-it-yourself home or automotive repairs and low-cost consumer goods. The same fervor for value has also pushed outlet centers to the forefront of retail real estate performance, researchers found.

“Outlet center performance has been outstanding in recent years, with developers racing to bring more centers to market to meet growing demand,” said Kristin Mueller, Chief Operating Officer, Jones Lang LaSalle.

“The quality of retailers tenanting outlets is becoming more sophisticated and upscale as well,” Mueller said. “Success has enabled outlet landlords to be more picky, and they have more retailers to choose from because even some luxury brands and department stores are dipping their feet into the outlet concept.”

Other highlights from the Spring Retail Forecast:

  • The slow improvement in retail real estate fundamentals reflects the glacial progress of the economic recovery; annualized gross domestic product growth averaged just 1.8 percent over the past four quarters, while the jobless rate stands at a disheartening 7.6 percent.
  • Vacancy nationwide inched down 10 basis points to 6.7 percent in the first quarter, down 80 basis points from the cyclical peak in the first half of 2010 but well above its 10-year average.
  • Strip and neighborhood shopping centers have the highest vacancy rate among property types at 10.4 percent, but are finally starting to see a turnaround, with vacancies dropping some 11 percent year-over-year for the first time since 2009. Power centers (large, unenclosed shopping centers with generally at least three big-box retailers) posted the largest vacancy decline, falling 60 basis points year-over-year to 5.9 percent.

JLL Retail offers comprehensive retail services to meet the expanding needs of investors and occupiers of real estate.  As the leading retail service provider, Jones Lang LaSalle manages a portfolio of 94 million square feet of retail centers within the United States and delivers service offerings to 80+ retailers – locally and nationally.  For more information on JLL Retail, visit www.jllretail.com.   

About Jones Lang LaSalle
Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet and completed $63 billion in sales, acquisitions and finance transactions in 2012. Its investment management business, LaSalle Investment Management, has $47.7 billion of real estate assets under management. For further information, visit www.jll.com.