Limited Supply Drives Down Vacancy in San Diego's Retail Sector

San Diego's retail sector continues to showcase resilience despite facing several economic and industry-wide challenges. While the market hasn’t displayed the strongest fundamentals compared to other major cities, it remains stable, supported by a significant factor: limited supply.

Market Overview: A Balancing Act

According to a recent report from JLL, the net absorption for San Diego’s retail market in 2024 was negative at -39,348 square feet. This marks the second consecutive year in the red, signaling ongoing hurdles for the sector. However, an interesting trend has emerged—vacancy rates have been steadily declining.

Key Highlights from Q4 2024:

• Vacancy rates dropped by 20 basis points, settling at 4%.
• Malls experienced the highest vacancy rates at 7.5%, followed by neighborhood centers at 4.7%.
• Retail space inventory shrank by over 1.1 million square feet between 2020 and 2024.
• In contrast, 1.5 million square feet of retail space was added between 2015 and 2019.

This contraction in retail space has been driven largely by redevelopment efforts, with obsolete retail properties being repurposed for other uses.

The Role of Redevelopment in Market Tightening

JLL attributes the decline in retail vacancy rates to the demolition of outdated retail spaces. Developers have been keen on repurposing these locations for mixed-use projects, multifamily developments, and experiential retail spaces, all of which better align with modern consumer trends.

Notable Developments:

• Stockdale Capital Partners' Downtown Project: This upcoming 300,000-square-foot development is expected to add fresh retail opportunities in a prime location.
• Under Construction Retail Space: Less than 500,000 square feet of retail space was under construction at the end of 2024, representing just 0.3% of total inventory.

With such limited new supply, existing retail properties are experiencing increased demand, keeping vacancy rates low despite broader industry challenges.

Rising Rents Amid Limited Supply

The constrained supply has also resulted in rising rents. In 2024, retail rents grew by 2.6%, reaching $36.36 per square foot. This upward trend is largely fueled by:

• Lack of new retail inventory, creating a landlord-favorable market.
• Strong demand for prime locations, especially in tourist-heavy areas.
• Shift toward experiential retail, where brands are willing to pay a premium for high-traffic spaces.

Challenges Facing San Diego’s Retail Sector

Despite declining vacancy and rising rents, the market is not without its struggles. Several factors continue to challenge growth:

• High cost of living: San Diego’s expensive housing market impacts disposable income, affecting retail spending.
• Retail store closures: National retailers and small businesses alike are adjusting strategies, leading to occasional closures.
• Slower employment growth: A deceleration in job creation impacts overall consumer spending.
• E-commerce competition: The shift towards online shopping continues to reshape the retail landscape.

The Role of Tourism in Retail Stability

One of the strongest pillars supporting San Diego’s retail market is tourism. The city's vibrant tourism industry drives substantial foot traffic to retail corridors, helping businesses stay afloat even during economic slowdowns. Popular destinations such as the Gaslamp Quarter, La Jolla, and Mission Beach continue to attract visitors who contribute significantly to retail sales.

Future Outlook: What’s Next for San Diego’s Retail Market?

Looking ahead, JLL remains optimistic about San Diego's retail sector, thanks to limited supply counterbalancing potential downturns. Some predictions for the future include:

• Continued rent growth: As space remains limited, rents are expected to trend upward.
• Further redevelopment projects: More obsolete retail spaces will likely be transformed into mixed-use developments.
• Retail evolution: The focus will shift towards experiential and service-oriented retail, which can thrive alongside e-commerce.
• Increased investor interest: With declining vacancy rates and strong rental demand, investors may find San Diego’s commercial real estate market attractive.

FAQs About San Diego’s Retail Market

1. Why are retail vacancy rates declining in San Diego? Retail vacancy rates are dropping due to a limited supply of new retail spaces, ongoing redevelopment of obsolete properties, and strong demand for prime locations.

2. How has rent growth been affected by limited supply? With fewer retail spaces available, rents have increased by 2.6% in 2024, reaching $36.36 per square foot. This trend is expected to continue as demand remains steady.

3. What are the biggest challenges facing San Diego’s retail sector? Challenges include high living costs, slower employment growth, retail store closures, and increasing competition from e-commerce. However, strong tourism helps offset some of these issues.

4. Are there any major retail developments in San Diego? Yes, Stockdale Capital Partners is developing a 300,000-square-foot retail space in Downtown San Diego, adding much-needed inventory to the market.

5. What types of retail businesses are thriving in San Diego? Retail businesses that focus on experiential retail, high-end brands, food and beverage, and tourism-focused offerings are performing well, benefiting from high foot traffic and consumer interest.

Conclusion

San Diego’s retail market presents an interesting dynamic of challenges and opportunities. While net absorption remains negative, the limited supply has helped keep vacancy rates low, with rents continuing to rise. The push toward redevelopment and mixed-use projects ensures that the sector adapts to modern retail needs. Despite hurdles such as high living costs and e-commerce disruption, tourism and strategic retail positioning keep the market relatively stable. Moving forward, investors, developers, and retailers who embrace San Diego’s evolving landscape will likely find success in this competitive yet promising commercial real estate market.

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