San Diego - The Jonna Group
RetailResearch M A R K E T
O V E R V I E W
San Diego Metro Area
Third Quarter 2015
Mom-and-Pop Retailers Return, Tightening Vacancy The San Diego metro continues to outpace the nation in job gains, fueling consumer spending and leading to further improvements in the area’s retail property performance. Nearly every employment sector has added back all positions lost during the recession, with many exceeding prior employment peaks. Amid the metro’s positive job outlook, retail sales will keep rising, attracting new tenants to the market. Vacancy remains at extremely tight levels, and a large portion of multitenant centers in the metro have stabilized. Local mom-and-pop retailers are making their return to the market, leasing inline space at area centers, further constricting vacancy and encouraging rent growth. As additional properties stabilize across the metro, retail construction should resume as several projects loom in the pipeline, providing some relief to the strengthening demand for retail space in the area. Rents will continue to grow this year yet fall short of the prior peak by 5 percent. Robust buyer demand that spurs intense bidding will keep sales activity strong in the San Diego metro through the remainder of the year. The return of mom-and-pop tenants is a boon to multi-tenant centers with small storefronts that need to be filled. As a result, many multi-tenant assets are beginning to stabilize, prompting owners to revisit listing opportunities or to invest additional capital into property improvements. Financing for retail assets has eased considerably and several banks are still competing at low interest rates. Private buyers are taking advantage of these terms and are most active in the market, searching for these stable multi-tenant deals throughout the area. An unanchored, C-plus asset trades near 6.5 percent, while an anchored deal can draw an initial yield closer to the low-6 percent range. Discussions on the Fed’s plan to raise interest rates later this year loom, and while it could pose a threat to increasing cap rates, investors will continue to have a favorable outlook for retail properties in the metro.
2015 Annual Retail Forecast 2.8% increase in total employment
Employment: Job growth will remain vigorous in the metro for the remainder of the year and organizations will create 38,000 positions in 2015, an annual increase of 2.8 percent. In 2014, local firms generated 35,500 positions as five of the 11 sectors added more than 5,000 workers each.
550,000 square feet will be completed
Construction: Deliveries will rise from last year as builders add 550,000 square feet of retail space to inventory in 2015, a 0.5 percent gain. In 2014, developers completed 375,000 square feet of retail space.
30 basis point decrease in vacancy
Vacancy: Demand for retail space in the metro will remain strong and vacancy will fall to 4 percent by year end, a 30-basis-point decline on absorption of 880,000 square feet. In 2014, vacancy at area retail properties dropped 60 basis points.
4.4% increase in asking rents
Rents: Rents will rise as vacancy remains tight and demand stays at heightened levels. This year, the average asking rent will grow 4.4 percent to $23.95 per square foot, following a 5.1 percent hike in 2014.
Economy ■■ San Diego employers added 5,800 positions during the second quarter, bring-
Metro
Askingtotal Rent Trendsworkers, a growth rate of 2.8 percent year over ing the annual to 37,500 States year. In theMetro previousUnited 12-month period, payrolls expanded 2.2 percent, or by 8% 29,600 jobs.
United States
Year-over-Year Change Square Feet Completed (millions) Year-over-Year Change Year-over-Year Change Vacancy Rate Square Feet Completed Square Feet Completed (millions) Vacancy Rate (millions)
4%
4% all employment sectors realized advancement during the last four quar■■ Nearly
3% 2%
Metro
Vacancy Rate
United States
-4%
8% ■■ Retail sales will grow 2.1 percent this year as labor force expansion continues to
0% 3%
11
12
13
14
15*
Employment Trends Retail Completions Metro
1% 1.00 4% 0% 0.75 3% 11 0.50 2%
RentSales Trends Trends the Single-Tenant yearAsking and organizations will create 38,000 positions in 2015, an annual Metro United States -4% increase of 2.8 percent. In 2014, local firms generated 35,500 positions as five $380 of 8% the 11 sectors added more than 5,000 workers each.
United States
12
13
14
15*
1.00 1% 0.25
0.50
0.50 6%
1313
14 14
15*
Metro
United States
13
14
15*
$290 0%
line in the last four quarters, up from the 416,000 square feet delivered in the -4% $380 $245 previous annual time frame. The Outlets at the Border was the largest delivery during the last year, adding 140,000 square feet of retail space to inventory. -8% $335 $200
1111
12 12
13 13
14
15* 15**
■■ There is nearly 240,000 square feet of retail space underway in the metro with
$380
■■ One of the largest developments underway in the metro is a 143,000-square-
11
12
13
14
15*
Vacancy Rate Trends Metro
3% 0.25 12% 0% 0 11 9% 11 6%
12
Construction
completion dates scheduled through the end of next year. In addition, de$290 Multi-Tenant Sales Trends velopers have roughly 2.8 Trends million square feet of retail space looming in the Single-Tenant Sales pipeline, though many projects will not come to fruition. $245 $360
Vacancy Rate Trends Retail Completions
0.25 1.00 12% 0.75 0 9%
1212
-8% $335 11 4%
■■ Builders have brought approximately Single-Tenant Sales Trends 630,000 square feet of retail space on-
Retail Completions
0.75 0% 0 11 11
fuel consumer spending. Though down from the 4.8 percent increase realized -8% 4% 11 12 has risen 13 in 2014, spending 37 14 percent15* since bottoming out in 2009.
0% ■■ Outlook: Job growth will remain vigorous in the metro for the remainder of
2%
12 12
United States
1313
1414
15*15*
Metro
0% 9% 11
13
14
$200
11 11
12 12
13 13
14 14
15** 15**
Multi-Tenant Sales Trends
■■ Net absorption of approximately 825,000 square feet brought retail property
United States
12
$200 $320 foot of $335Target 11 at the 12intersection 13 14 Camino 15** Del Sur and Paseo Del Sur. The store will anchor the retail center Del Sur Town Center, which is currently being $280 developed, and will be one Trends of two locations opening in the metro this year. $290Multi-Tenant Sales ■■ Outlook: Deliveries will rise from last year as builders add 550,000 square $360 $240 $245 feet of retail space to inventory in 2015, increasing space 0.5 percent. In 2014, contractors brought 375,000 square feet of retail space online. $320 $200 $280 Vacancy
Vacancy Rate Trends
3% 12%
$240 $360 vacancy
15*
down 20 basis points in the last four quarters to 4.5 percent at midyear. In the prior year-long period, vacancy fell 30 basis points on net absorp$200 $320of 660,000 11 12 15** tion square13 feet. 14
■■ Multi-tenant retail vacancy dropped 30 basis points in the last year, reaching $280
6%
4.8 percent in June. Vacancy also dropped 30 basis points in the previous four quarters on net absorption of 330,000 square feet. $240
3%
■■ Conditions are tight across the metro: Vacancy fell below 4 percent in Central
11
12
* Forecast Source: CoStar Group, Inc.
page 2
ters, with professional and business services and education and health services 0% accounting for the bulk of additions. These sectors grew by 9,800 sectors Asking Rent Trends workers and 7,800 positions, respectively. Metro United States
Employment Trends
1% 4%
0%
Average Price per Square Foot Average Price per Square Foot Year-over-Year Change Average Foot Price per Square Average Foot Year-over-Year Change Average Price per Square FootPrice per Square Average FootPrice per SquareYear-over-Year Change
Employment Trends
13
14
15*
$200Diego, East County, the I-15 Corridor and Outlying North San Diego San 11 12 13 14 15** County.
■■ Outlook: Demand for retail space in the metro will remain robust and vacan-
cy will fall to 4 percent by year end, a 30-basis-point decline on absorption of 880,000 square feet. Marcus & Millichap
u
Retail Research Report
Rents ■■ Tight conditions warrant rent growth, and the average asking rent rose to
■■ As space was absorbed and the metro was left with limited, quality available 2% multi-tenant retail space for lease, rents have taken a slightTrends dip. The average Employment asking rent at multi-tenant centers fell to $21.51 per square foot, a decline of Metro United States 4% 0.1 percent year over year. In the prior1% year, rents grew 2.4 percent.
■■ The I-15 corridor, North San Diego County and Outlying North San Diego 0% 3%
13 annual 14 advances 15* County were the only submarkets to post11gains, 12and those were near 10 percent or higher. 2%
Completions ■■ Outlook: This year, the average asking rentRetail will grow 4.4 percent Employment Trendsto $23.95
per square foot, following a 5.1
1% 1.00 percent hike 4%
in Metro 2014.
United States
12
13
14
15*
■■ Single-tenant transaction velocity climbed 0.50 8 percent in the last year as buyers
continued targeting assets in the metro.2% The Retail bulk ofCompletions deals occurred in Central San Diego, which had 40 percent of all trades during the period. 1.00 0.25 1%
■■ The average price per square foot for single-tenant properties ticked up almost 0.75 0% 0 quarter. 4 percent annually to $366 in the second 11 11
12 12
13 13
1414
15*15*
■■ Cap rates in this segment compressed 0.50 30 basis points in the last four quarters
to the mid-5 percent range. Banks and fast-food establishments typically sold Vacancy Rate Trends Retail Completions at initial yields below 5 percent during the period, tenant credit Metro depending Unitedon States 0.25 1.00 and location. 12%
■■ Outlook: Single-tenant assets will remain in high demand in the coming 0 0.75 9%
11 15* months. While concerns over rising interest rates 12 could 13 have an14impact on multi-tenant properties, the effects will6% be much smaller on single-tenant deals 0.50 Vacancy Rate Trends as many trade for cash. 3% 0.25 12%
Multi-Tenant Sales Trends** 0%
9%011
Metro
12
United States
13
14
15*
market drew additional buyers to market 6% and encouraged owners to divest. The North County retail submarket received a steep Rate increase in transaction Vacancy Trends velocity; the number of sales rose over 3% 50 percent area alone. Metroin thisUnited States Central San Diego and South Bay also remained popular with investors. 12% 0% 9%
■■ Intense bidding for multi-tenant assets pushed prices up 13at the fastest pace 11 12 14 15* Vacancy Rate
since 2011. The average price per square foot grew nearly 5 percent annually to $325 in June. Strip centers containing two to four national- or regional-credit 6% tenants in prime locations are drawing significant buyer interest and have sold for more than $400 per square foot. 3%
■■ Multi-tenant cap rates averaged near 6 percent year over year in the second 0% ago. Rates compressed to the midquarter, down 30 basis points from one year 11 12 13 14 15* 4 percent range during the period for best-in-class strip centers.
■■ Outlook: As owners bring rents to market and stabilize assets, many will revis-
it the opportunity to list while cap rates and interest rates remain low, especially as the Fed toys with the idea of raising rates in the near future. u
Retail Research Report
United States
4% 0%
Asking Rent Trends Metro
-4% 8% -8% 4% 11
United States
12
13
14
15*
0%
Single-Tenant Sales Trends Asking Rent Trends Metro
-8% $335 11 4%
12
United States
13
14
15*
$290 0%
Single-Tenant Sales Trends
$245 $380 -4% $200 $335 -8%
11 11
1212
1313
14 14
15**15*
$290
Multi-Tenant Sales Trends Single-Tenant Sales Trends
$360 $245 $380
$320 $200 $335 11
12
$280 $290 Multi-Tenant
13
14
15**
Sales Trends
$240 $360 $245
12 14 15* ■■ Sales activity was up 14 percent in the last 11 12 months as 13 a stabilizing retail
Marcus & Millichap
Metro 8%
-4% $380 8%
0%
0.75 Single-Tenant Sales Trends** 3%11
Asking Rent Trends Average Price per Square Foot Average SquareYear-over-Year Foot Year-over-Year Change Average Foot Average FootPrice perChange Change Average Price per Square Foot Price per Square Average Price per Square Foot Price per Square Year-over-Year
Year-over-Year Change Vacancy Rate Square Feet Completed (millions) Vacancy Rate Feet Completed (millions) Year-over-Year ChangeYear-over-Year Change Square Feet CompletedSquare (millions)
$23.05 per square foot in June, an increaseEmployment of 1.5 percent Trends year over year. San Metro United States Diego remains one of the tightest retail markets in the country, and with the 4% majority of available space located in areas with softer demographics, the pace of rent gains is expected to slow this year. 3%
$200 $320 $200 11 11
12 12
13 13
14 14
15** 15**
$280
Multi-Tenant Sales Trends $240 $360 $200 $320 11
12
13
14
15**
$280 $240 $200
11
12
13
14
15**
* Forecast ** Trailing 12-month period through 2Q Source: CoStar Group, Inc.
page 3
COLOR LINE VERSION
Capital Markets By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation
■■ Several macroeconomic headwinds, including the strong dollar and lower en-
BLACK TEXT VERSION Visit www.NationalRetailGroup.com or call: Bill Rose Vice President, National Director National Retail Group Tel: (858) 373-3100 [email protected]
ergy prices, have recently dropped the yield on the 10-year U.S. Treasury to the low-2 percent range. Despite weakness abroad, U.S. economic data remains robust as existing home sales hit levels not seen since 2006 and retail sales growth indicates a willingness by consumers to spend in areas beyond the essentials. Additionally, jobless claims are just above a 41-year low and more than WHITE TEXT VERSION 200,000 positions have been created in 14 of the last 16 months, providing further evidence of broad strength in the labor market. ■■ The Federal Open Market Committee has committed to a policy of “lower for
longer” as it assuages fears surrounding a possible interest rate increase this fall. The initial policy rate change is expected to be just 25 basis points, the first hike since 2006, with measures remaining accommodative for several years.
■■ Life insurance firms are underwriting with terms of up to 25 years for retail
loans. Their 10-year pricing ranges between 4 and 4.25 percent with average LTVs from 60 to 65 percent. Meanwhile, CMBS lenders are offering 10-year terms at rates between 4.4 and 4.65 percent, with LTVs at 75 percent. Commercial banks are also active in the sector, generally offering shorter-term loans from 3.75 to 4.75 percent for 70 percent leverage. Floating bridge loans for stabilized assets will require LTVs of 70 percent and price with a spread between 250 and 425 basis points over LIBOR, while value-add transactions will be underwritten at 80 percent LTV (60-65 percent of cost) with a 300- to 475-basis-point spread.
■■ Total CMBS issuance reached $52 billion by the end of the second quarter, rep-
Prepared and edited by Jessica Hill Research Analyst Research Services For information on national retail trends, contact John Chang First Vice President, Research Services Tel: (602) 687-6700 [email protected] San Diego Office: John Vorsheck First Vice President, Regional Manager [email protected] 9255 Towne Centre Drive Suite 700 San Diego, California 92121 Tel: (858) 373-3100 Fax: (858) 373-3110 Price: $150 © Marcus & Millichap 2015 www.MarcusMillichap.com
resenting a sizable uptick from last year. More than $600 billion in CMBS is expected to come to market during the next few years as pre-crisis loans come due, prompting owners to renegotiate their capital structure at much lower interest rates. Many of these owners may choose to list their assets instead, providing investors an opportunity to place capital in highly sought-after markets.
Local Highlights ■■ The metro’s unemployment rate squeezed below 5 percent for the first time
since the recession in the second quarter. The rate dipped dramatically over the last 12 months, reaching 4.9 percent after tumbling 150 basis points year over year.
■■ Construction on the Mid-Coast Trolley expansion, which will provide service
from Santa Fe Depot in downtown San Diego to the University City neighborhood, is anticipated to begin in early 2016. While passenger service will not begin until 2020, the population in the corridor is expected to climb 19 percent within 10 years of opening and nearby retailers will benefit from the increased foot traffic.
■■ Fierce competition in the metro’s apartment market could shift some investor
attention to retail assets as returns remain favorable. This will stiffen competition for area retail properties further; however, listing activity could see a bump up in the coming months if interest rates begin to rise.
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. Triple-net rents are used. Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Economy.com; Real Capital Analytics; TWR/Dodge Pipeline; U.S. Census Bureau.
O V E R V I E W
San Diego Metro Area
Third Quarter 2015
Mom-and-Pop Retailers Return, Tightening Vacancy The San Diego metro continues to outpace the nation in job gains, fueling consumer spending and leading to further improvements in the area’s retail property performance. Nearly every employment sector has added back all positions lost during the recession, with many exceeding prior employment peaks. Amid the metro’s positive job outlook, retail sales will keep rising, attracting new tenants to the market. Vacancy remains at extremely tight levels, and a large portion of multitenant centers in the metro have stabilized. Local mom-and-pop retailers are making their return to the market, leasing inline space at area centers, further constricting vacancy and encouraging rent growth. As additional properties stabilize across the metro, retail construction should resume as several projects loom in the pipeline, providing some relief to the strengthening demand for retail space in the area. Rents will continue to grow this year yet fall short of the prior peak by 5 percent. Robust buyer demand that spurs intense bidding will keep sales activity strong in the San Diego metro through the remainder of the year. The return of mom-and-pop tenants is a boon to multi-tenant centers with small storefronts that need to be filled. As a result, many multi-tenant assets are beginning to stabilize, prompting owners to revisit listing opportunities or to invest additional capital into property improvements. Financing for retail assets has eased considerably and several banks are still competing at low interest rates. Private buyers are taking advantage of these terms and are most active in the market, searching for these stable multi-tenant deals throughout the area. An unanchored, C-plus asset trades near 6.5 percent, while an anchored deal can draw an initial yield closer to the low-6 percent range. Discussions on the Fed’s plan to raise interest rates later this year loom, and while it could pose a threat to increasing cap rates, investors will continue to have a favorable outlook for retail properties in the metro.
2015 Annual Retail Forecast 2.8% increase in total employment
Employment: Job growth will remain vigorous in the metro for the remainder of the year and organizations will create 38,000 positions in 2015, an annual increase of 2.8 percent. In 2014, local firms generated 35,500 positions as five of the 11 sectors added more than 5,000 workers each.
550,000 square feet will be completed
Construction: Deliveries will rise from last year as builders add 550,000 square feet of retail space to inventory in 2015, a 0.5 percent gain. In 2014, developers completed 375,000 square feet of retail space.
30 basis point decrease in vacancy
Vacancy: Demand for retail space in the metro will remain strong and vacancy will fall to 4 percent by year end, a 30-basis-point decline on absorption of 880,000 square feet. In 2014, vacancy at area retail properties dropped 60 basis points.
4.4% increase in asking rents
Rents: Rents will rise as vacancy remains tight and demand stays at heightened levels. This year, the average asking rent will grow 4.4 percent to $23.95 per square foot, following a 5.1 percent hike in 2014.
Economy ■■ San Diego employers added 5,800 positions during the second quarter, bring-
Metro
Askingtotal Rent Trendsworkers, a growth rate of 2.8 percent year over ing the annual to 37,500 States year. In theMetro previousUnited 12-month period, payrolls expanded 2.2 percent, or by 8% 29,600 jobs.
United States
Year-over-Year Change Square Feet Completed (millions) Year-over-Year Change Year-over-Year Change Vacancy Rate Square Feet Completed Square Feet Completed (millions) Vacancy Rate (millions)
4%
4% all employment sectors realized advancement during the last four quar■■ Nearly
3% 2%
Metro
Vacancy Rate
United States
-4%
8% ■■ Retail sales will grow 2.1 percent this year as labor force expansion continues to
0% 3%
11
12
13
14
15*
Employment Trends Retail Completions Metro
1% 1.00 4% 0% 0.75 3% 11 0.50 2%
RentSales Trends Trends the Single-Tenant yearAsking and organizations will create 38,000 positions in 2015, an annual Metro United States -4% increase of 2.8 percent. In 2014, local firms generated 35,500 positions as five $380 of 8% the 11 sectors added more than 5,000 workers each.
United States
12
13
14
15*
1.00 1% 0.25
0.50
0.50 6%
1313
14 14
15*
Metro
United States
13
14
15*
$290 0%
line in the last four quarters, up from the 416,000 square feet delivered in the -4% $380 $245 previous annual time frame. The Outlets at the Border was the largest delivery during the last year, adding 140,000 square feet of retail space to inventory. -8% $335 $200
1111
12 12
13 13
14
15* 15**
■■ There is nearly 240,000 square feet of retail space underway in the metro with
$380
■■ One of the largest developments underway in the metro is a 143,000-square-
11
12
13
14
15*
Vacancy Rate Trends Metro
3% 0.25 12% 0% 0 11 9% 11 6%
12
Construction
completion dates scheduled through the end of next year. In addition, de$290 Multi-Tenant Sales Trends velopers have roughly 2.8 Trends million square feet of retail space looming in the Single-Tenant Sales pipeline, though many projects will not come to fruition. $245 $360
Vacancy Rate Trends Retail Completions
0.25 1.00 12% 0.75 0 9%
1212
-8% $335 11 4%
■■ Builders have brought approximately Single-Tenant Sales Trends 630,000 square feet of retail space on-
Retail Completions
0.75 0% 0 11 11
fuel consumer spending. Though down from the 4.8 percent increase realized -8% 4% 11 12 has risen 13 in 2014, spending 37 14 percent15* since bottoming out in 2009.
0% ■■ Outlook: Job growth will remain vigorous in the metro for the remainder of
2%
12 12
United States
1313
1414
15*15*
Metro
0% 9% 11
13
14
$200
11 11
12 12
13 13
14 14
15** 15**
Multi-Tenant Sales Trends
■■ Net absorption of approximately 825,000 square feet brought retail property
United States
12
$200 $320 foot of $335Target 11 at the 12intersection 13 14 Camino 15** Del Sur and Paseo Del Sur. The store will anchor the retail center Del Sur Town Center, which is currently being $280 developed, and will be one Trends of two locations opening in the metro this year. $290Multi-Tenant Sales ■■ Outlook: Deliveries will rise from last year as builders add 550,000 square $360 $240 $245 feet of retail space to inventory in 2015, increasing space 0.5 percent. In 2014, contractors brought 375,000 square feet of retail space online. $320 $200 $280 Vacancy
Vacancy Rate Trends
3% 12%
$240 $360 vacancy
15*
down 20 basis points in the last four quarters to 4.5 percent at midyear. In the prior year-long period, vacancy fell 30 basis points on net absorp$200 $320of 660,000 11 12 15** tion square13 feet. 14
■■ Multi-tenant retail vacancy dropped 30 basis points in the last year, reaching $280
6%
4.8 percent in June. Vacancy also dropped 30 basis points in the previous four quarters on net absorption of 330,000 square feet. $240
3%
■■ Conditions are tight across the metro: Vacancy fell below 4 percent in Central
11
12
* Forecast Source: CoStar Group, Inc.
page 2
ters, with professional and business services and education and health services 0% accounting for the bulk of additions. These sectors grew by 9,800 sectors Asking Rent Trends workers and 7,800 positions, respectively. Metro United States
Employment Trends
1% 4%
0%
Average Price per Square Foot Average Price per Square Foot Year-over-Year Change Average Foot Price per Square Average Foot Year-over-Year Change Average Price per Square FootPrice per Square Average FootPrice per SquareYear-over-Year Change
Employment Trends
13
14
15*
$200Diego, East County, the I-15 Corridor and Outlying North San Diego San 11 12 13 14 15** County.
■■ Outlook: Demand for retail space in the metro will remain robust and vacan-
cy will fall to 4 percent by year end, a 30-basis-point decline on absorption of 880,000 square feet. Marcus & Millichap
u
Retail Research Report
Rents ■■ Tight conditions warrant rent growth, and the average asking rent rose to
■■ As space was absorbed and the metro was left with limited, quality available 2% multi-tenant retail space for lease, rents have taken a slightTrends dip. The average Employment asking rent at multi-tenant centers fell to $21.51 per square foot, a decline of Metro United States 4% 0.1 percent year over year. In the prior1% year, rents grew 2.4 percent.
■■ The I-15 corridor, North San Diego County and Outlying North San Diego 0% 3%
13 annual 14 advances 15* County were the only submarkets to post11gains, 12and those were near 10 percent or higher. 2%
Completions ■■ Outlook: This year, the average asking rentRetail will grow 4.4 percent Employment Trendsto $23.95
per square foot, following a 5.1
1% 1.00 percent hike 4%
in Metro 2014.
United States
12
13
14
15*
■■ Single-tenant transaction velocity climbed 0.50 8 percent in the last year as buyers
continued targeting assets in the metro.2% The Retail bulk ofCompletions deals occurred in Central San Diego, which had 40 percent of all trades during the period. 1.00 0.25 1%
■■ The average price per square foot for single-tenant properties ticked up almost 0.75 0% 0 quarter. 4 percent annually to $366 in the second 11 11
12 12
13 13
1414
15*15*
■■ Cap rates in this segment compressed 0.50 30 basis points in the last four quarters
to the mid-5 percent range. Banks and fast-food establishments typically sold Vacancy Rate Trends Retail Completions at initial yields below 5 percent during the period, tenant credit Metro depending Unitedon States 0.25 1.00 and location. 12%
■■ Outlook: Single-tenant assets will remain in high demand in the coming 0 0.75 9%
11 15* months. While concerns over rising interest rates 12 could 13 have an14impact on multi-tenant properties, the effects will6% be much smaller on single-tenant deals 0.50 Vacancy Rate Trends as many trade for cash. 3% 0.25 12%
Multi-Tenant Sales Trends** 0%
9%011
Metro
12
United States
13
14
15*
market drew additional buyers to market 6% and encouraged owners to divest. The North County retail submarket received a steep Rate increase in transaction Vacancy Trends velocity; the number of sales rose over 3% 50 percent area alone. Metroin thisUnited States Central San Diego and South Bay also remained popular with investors. 12% 0% 9%
■■ Intense bidding for multi-tenant assets pushed prices up 13at the fastest pace 11 12 14 15* Vacancy Rate
since 2011. The average price per square foot grew nearly 5 percent annually to $325 in June. Strip centers containing two to four national- or regional-credit 6% tenants in prime locations are drawing significant buyer interest and have sold for more than $400 per square foot. 3%
■■ Multi-tenant cap rates averaged near 6 percent year over year in the second 0% ago. Rates compressed to the midquarter, down 30 basis points from one year 11 12 13 14 15* 4 percent range during the period for best-in-class strip centers.
■■ Outlook: As owners bring rents to market and stabilize assets, many will revis-
it the opportunity to list while cap rates and interest rates remain low, especially as the Fed toys with the idea of raising rates in the near future. u
Retail Research Report
United States
4% 0%
Asking Rent Trends Metro
-4% 8% -8% 4% 11
United States
12
13
14
15*
0%
Single-Tenant Sales Trends Asking Rent Trends Metro
-8% $335 11 4%
12
United States
13
14
15*
$290 0%
Single-Tenant Sales Trends
$245 $380 -4% $200 $335 -8%
11 11
1212
1313
14 14
15**15*
$290
Multi-Tenant Sales Trends Single-Tenant Sales Trends
$360 $245 $380
$320 $200 $335 11
12
$280 $290 Multi-Tenant
13
14
15**
Sales Trends
$240 $360 $245
12 14 15* ■■ Sales activity was up 14 percent in the last 11 12 months as 13 a stabilizing retail
Marcus & Millichap
Metro 8%
-4% $380 8%
0%
0.75 Single-Tenant Sales Trends** 3%11
Asking Rent Trends Average Price per Square Foot Average SquareYear-over-Year Foot Year-over-Year Change Average Foot Average FootPrice perChange Change Average Price per Square Foot Price per Square Average Price per Square Foot Price per Square Year-over-Year
Year-over-Year Change Vacancy Rate Square Feet Completed (millions) Vacancy Rate Feet Completed (millions) Year-over-Year ChangeYear-over-Year Change Square Feet CompletedSquare (millions)
$23.05 per square foot in June, an increaseEmployment of 1.5 percent Trends year over year. San Metro United States Diego remains one of the tightest retail markets in the country, and with the 4% majority of available space located in areas with softer demographics, the pace of rent gains is expected to slow this year. 3%
$200 $320 $200 11 11
12 12
13 13
14 14
15** 15**
$280
Multi-Tenant Sales Trends $240 $360 $200 $320 11
12
13
14
15**
$280 $240 $200
11
12
13
14
15**
* Forecast ** Trailing 12-month period through 2Q Source: CoStar Group, Inc.
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COLOR LINE VERSION
Capital Markets By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation
■■ Several macroeconomic headwinds, including the strong dollar and lower en-
BLACK TEXT VERSION Visit www.NationalRetailGroup.com or call: Bill Rose Vice President, National Director National Retail Group Tel: (858) 373-3100 [email protected]
ergy prices, have recently dropped the yield on the 10-year U.S. Treasury to the low-2 percent range. Despite weakness abroad, U.S. economic data remains robust as existing home sales hit levels not seen since 2006 and retail sales growth indicates a willingness by consumers to spend in areas beyond the essentials. Additionally, jobless claims are just above a 41-year low and more than WHITE TEXT VERSION 200,000 positions have been created in 14 of the last 16 months, providing further evidence of broad strength in the labor market. ■■ The Federal Open Market Committee has committed to a policy of “lower for
longer” as it assuages fears surrounding a possible interest rate increase this fall. The initial policy rate change is expected to be just 25 basis points, the first hike since 2006, with measures remaining accommodative for several years.
■■ Life insurance firms are underwriting with terms of up to 25 years for retail
loans. Their 10-year pricing ranges between 4 and 4.25 percent with average LTVs from 60 to 65 percent. Meanwhile, CMBS lenders are offering 10-year terms at rates between 4.4 and 4.65 percent, with LTVs at 75 percent. Commercial banks are also active in the sector, generally offering shorter-term loans from 3.75 to 4.75 percent for 70 percent leverage. Floating bridge loans for stabilized assets will require LTVs of 70 percent and price with a spread between 250 and 425 basis points over LIBOR, while value-add transactions will be underwritten at 80 percent LTV (60-65 percent of cost) with a 300- to 475-basis-point spread.
■■ Total CMBS issuance reached $52 billion by the end of the second quarter, rep-
Prepared and edited by Jessica Hill Research Analyst Research Services For information on national retail trends, contact John Chang First Vice President, Research Services Tel: (602) 687-6700 [email protected] San Diego Office: John Vorsheck First Vice President, Regional Manager [email protected] 9255 Towne Centre Drive Suite 700 San Diego, California 92121 Tel: (858) 373-3100 Fax: (858) 373-3110 Price: $150 © Marcus & Millichap 2015 www.MarcusMillichap.com
resenting a sizable uptick from last year. More than $600 billion in CMBS is expected to come to market during the next few years as pre-crisis loans come due, prompting owners to renegotiate their capital structure at much lower interest rates. Many of these owners may choose to list their assets instead, providing investors an opportunity to place capital in highly sought-after markets.
Local Highlights ■■ The metro’s unemployment rate squeezed below 5 percent for the first time
since the recession in the second quarter. The rate dipped dramatically over the last 12 months, reaching 4.9 percent after tumbling 150 basis points year over year.
■■ Construction on the Mid-Coast Trolley expansion, which will provide service
from Santa Fe Depot in downtown San Diego to the University City neighborhood, is anticipated to begin in early 2016. While passenger service will not begin until 2020, the population in the corridor is expected to climb 19 percent within 10 years of opening and nearby retailers will benefit from the increased foot traffic.
■■ Fierce competition in the metro’s apartment market could shift some investor
attention to retail assets as returns remain favorable. This will stiffen competition for area retail properties further; however, listing activity could see a bump up in the coming months if interest rates begin to rise.
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. Triple-net rents are used. Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Economy.com; Real Capital Analytics; TWR/Dodge Pipeline; U.S. Census Bureau.
