Retail Investors Expected to Escalate Shopping in Second Half

JLL: San Diego Could See Half-Dozen Large Property Deals

Outlets at the Border in San Ysidro, with an initial asking price of $60 million, is among the few large retail centers currently listed for sale in tight-supplied San Diego County.

Researchers at brokerage firm JLL are expecting nationwide retail property investment to pick up from recently sluggish levels in the second half of 2018. And even supply-constrained San Diego County, where prominent properties rarely hit the market, is expected to share in the trend.

JLL recently reported that U.S. retail investment sales reached $12.8 billion between January and April of this year, down 46 percent from the year-ago period. Their researchers attributed the trend to investor caution and a perception that current retail returns are not commensurate with current valuations.

“Many investors are either allocating their capital into other property types, to debt versus equity, or taking a temporary pause,” said Naveen Jaggi, JLL’s president of retail advisory services.

But retail in coming months is expected to join overall upticks across the major property categories, as institutional and other large investors take parked money off the sidelines. Among current factors is a nationwide retail vacancy rate that has stabilized at under 5 percent, with rents reaching pre-recession levels.

Geoff Tranchina, an executive vice president in the Los Angeles office of JLL, said the firm expects San Diego to see around six or seven significant, multi-tenant retail property deals completed in the second half of 2018. In San Diego and other markets with tight supply, the listing of certain retail properties will likely be done in a manner that is more selective than is generally seen with commercial property marketing.

“It’s probably going to be focused on larger investors that have a very targeted pool of money to invest,” Tranchina said.

Locally and elsewhere on the West Coast in particular, he said, several large national and regional retail buyers have been completing deals and scouting others in recent months. Those include Costa Mesa-based Donahue Schriber and Florida-based Regency Centers, both of which already own several retail centers in the San Diego market.

Tranchina said the most promising prospects for local and national sales activity are for centers anchored by discount clothing chains, grocers, drugstores and other necessity-based retailers. Less rosy are the prospects for so-called power centers – where all or most of the anchor tenants are big-box chains – as the major U.S. chain retailers experience declines in revenue and ultimately their potential to stimulate retail rent growth.

Experts have long noted that San Diego County is relatively immune to the periodic highs and lows of the retail real estate economy, due to extremely limited construction and other barriers to entry in the most popular submarkets. The most high-profile retail centers have long waiting lists of prospective tenants, meaning vacated spaces don’t remain empty for long.

The latest data from CoStar Market Analytics shows the San Diego market’s overall retail vacancy rate at 3.7 percent, below the national rate of 4.6 percent. While property sales volume for the past 12 months reached $1 billion, that was down 14.7 percent from the prior period.

Meanwhile, the average local retail asking rent of $2.39 per square foot is above the nationwide $1.72 – although local rent growth was basically flat for the past year. On the new-supply front, retail product under construction represents less than a half-percent of the San Diego market’s total inventory, on par with trends for the past several years.

If the JLL projections come to pass, San Diego County’s second-half retail property investment activity would likely top the limited levels seen in the same period of 2017 and prior years. For several years, large multi-tenant retail centers in top locations have rarely gone on the market locally.

According to CoStar data, two that are known to be for sale are the 134,950-square-foot Outlets at the Border in San Ysidro, placed up for sale by owner The Shamrock Group in mid-April with an asking price of $60 million, and the 164,829-square-foot, eight-building Vista Village Phase 1 in Vista, placed on the market in mid-May by owner DDR Corp. with an asking price of $78.6 million. Property owners and their brokers – both are being marketed by CBRE Group – declined to comment.

It is also known that Westfield Group, recently acquired by Unibail-Rodamco, remains in talks to sell its aging Westfield Horton Plaza retail center in downtown San Diego, possibly to a large private equity firm that would undertake a subsequent redevelopment. Local Westfield officials were not commenting.

Barring a major outside jolt to the economy, retail experts note upcoming prospects for nationwide retail investment could be enhanced in the second half, for instance, by Congress’ recent passing of the Tax Cuts and Jobs Act, and expected resulting growth in gross domestic product.

JLL said retail fundamentals remain strong in most major U.S. markets, new retail construction remains limited, and a historically strong 13.4 million square feet of retail space was absorbed nationally this year through April. One caveat, JLL noted, is that some property types are seeing rising vacancy rates recently, with general shopping centers at 7.3 percent nationwide, though all categories generally have seen declining vacancies since the Great Recession.

Lou Hirsh, San Diego Market Reporter  CoStar Group