San Diego Fills Empty Big-Box Space at Faster Pace This Year

Brokers Watch for Growing Retailer Woes, Vacancy Rate

This former Sears in Chula Vista was the San Diego region's largest vacant big-box retail space at the mid-point of 2019. (CoStar)
This former Sears in Chula Vista was the San Diego region’s largest vacant big-box retail space at the mid-point of 2019. (CoStar)
AUGUST 15, 2019|LOU HIRSH (via COSTAR Group)

In the first half of this year, San Diego has already outpaced last year in back-filling vacant big-box retail spaces, but that hasn’t stopped the square footage of empty stores from rising.

Brokerage CBRE Group reported that the San Diego region had 25 vacant locations spanning 428,849 square feet back-filled during the first six months of this year, significantly ahead of the 309,883 square feet absorbed during the entire year in 2018.

Still, San Diego’s current vacant big-box square footage was up slightly to 902,997 square feet in July, from the 884,021 square feet that existed at the end of 2018, though the number of vacant locations is the same at 29.

A recent wave of nationwide closing announcements by retail and restaurant tenants including Sears, Walgreens and Perkins have accelerated the growth in retail occupancy nationwide. San Diego, a dense city in the nation’s most populous state, has long been a high-demand retail hub that historically quickly leases vacated big-box space.

Brokers said the latest numbers suggest San Diego is maintaining that trend, filling spaces withing a relatively quick 12 to 18 months after they’re vacated. Many national chain retailers are lining up to establish first, second and third locations as spaces become available in the city. For instance, most of the local spaces vacated during the past two years by Toys R Us and Sports Authority have already been filled up by other national and regional chains.

The latest CoStar market data showed San Diego’s retail vacancy rate at roughly 3.9%, below the national average of 4.5%, and its average monthly retail rent of $2.46 per square foot topped the nation’s average of $1.76.

The growing vacancies have stalled local rent growth to 0.4%, lagging the national rate of 1.1% for the past year, according to CoStar. However, little new retail space is being built in San Diego, with the 484,000 square feet under construction representing just 0.3% of total current inventory.

From a property investment standpoint, investors remain bullish on San Diego retail, thanks to factors including continued strength in tourism and job growth in high-paying industries like technology and life science.

“Retail is the only commercial sector in San Diego that has not followed a slow decline after peaking in 2015,” CoStar Managing Analyst Joshua Ohl said in a recent report.

Going forward, CBRE researchers said there is some local concern brought about by continued closures spurred by financial woes at retailers like Sears and Kmart, which caused 151,246 square feet to become newly vacant in San Diego in the first half of 2019. However, the recent announcement by Transform Co., parent of both retailers, that it plans to close an additional 26 big-box stores nationally did not impact San Diego.

The region’s largest big-box vacant space at the year’s midpoint was a 107,796-square-foot former Sears at 565 Broadway in Chula Vista, followed by a 98,194-square-foot space that formerly housed Kmart at 4330 Camino De La Plaza in San Ysidro.

Back-filling of those and other spaces may depend on where they sit in relationship to shoppers, with stores in less desirable locations taking longer to fill, according to Brad Jones, first vice president in CBRE’s San Diego office.

“It really depends on the location as always,” Jones told CoStar News.

In prime locations like University Town Center, there has been no trouble repurposing vacated space. Jones pointed to Seritage’s ongoing redevelopment of a former Sears at the Westfield UTC mall, being converted for use by several tenants opening soon, including fitness chain Equinox and cowork space provider Industrious.

In other locations, he said big box spaces could be divided up for use by multiple tenants now scouting the local market.

In San Diego and other markets, local and regional retailers are looking to build national footprints, such as ethnic grocers, fitness chains and discount furniture stores. National chains like Target have recently been bolstering their existing market footprints by opening new smaller-format stores in San Diego and other cities.

“Also, there have been rumors of co-working concepts having interest in absorbing the large boxes in suburban markets,” Jones said.