Field Notes: San Diego

I arrived in San Diego on 17 January for a three-day trip to meet with colleagues, learn about the various development projects in the Southern California market, and attend an ICSC local event in San Diego. To get here required a tense observation of the ice storm at home in Lincoln, NE. A storm that made travel nearly impossible for about 36 hours. But, an eight hour warming period provided a sliver of opportunity to catch my flight to the City with Sol (i.e., "Sun").

And the sun gave me a warm greeting. The first stop on my three-day visit was to Blue Water Seafood Market and Grill for lunch. I visit a lot of cities throughout the year on assignment with clients. One way for me to understand a marketplace is by immersing myself in the place itself. A baptism of sorts in the local folk-ways; or patterns of life. That deep-dive necessarily includes the local culinary scene. But, I digress.

Here are some briefly-worded field notes from this trip. Hopefully this is useful to colleagues involved in San Diego's growth and development. Plus those who are considering San Diego's opportunities. Please feel free to share your comments.

Downtown: East Village

East Village is a neighborhood in downtown San Diego. Generally bounded by I-5 to the east and north; 6th Avenue to the west; and Imperial Avenue to the south (see map in the gallery). This area has grown from 2,415 households in 2000 to an estimated 8,029 in 2017 (Claritas). That growth is visible in the crains hoisting steel beams for new high-rise residential buildings.

EV Lofts is one analog of this growth (see picture in the gallery). Built in 2015, this 208-unit property reached equilibrium occupancy of 95% within one year (CoStar). It also has as retail tenants Beshock Ramen restaurant and sake bar, Evolution Pizza and Elite Health on the ground-floor.

Likewise, the 264-unit 13th & Market achieved equilibrium occupancy within one year, and has 20,000 sf of street-level retail that includes Caffe Primo, Doozydog Club, Massage Envy Spa, Rooster's Men's Grooming Center, and Man Cleaners.

There are either planned or under construction approximately 4,089 new units and 65,000 sf of new retail tenant space that will come onto the market between 2017 and 2019 (CoStar).

Suburbs: Development

Notable expansions and new development in the San Diego suburban area:

  • Westfield University Town Center is a beautiful open-air center along I-5 that is anchored by Nordstrom, Macy's and Sears. The center has several click-to-bricks retailers such as a Amazon Books (next to the Tesla retail store), Athleta, Bonobos, and Warby Parker. Crate & Barrel, Pirch, and Restoration Hardware are part of strong co-tenancy mix with other specialty retail stores, dining options and ArcLight Cinemas. UTC is currently undergoing an expansion of 251,000 SF of 90 or so new-to-market luxury retail stores and restaurants.  Delivery is scheduled for October 2017.
  • Donahue Schriber's Del Mar Highlands Town Center is a 296,000 SF power center in the affluent Carmel Valley trade area.  Anchor retailers include Ralph's Fresh Fare and Cinepolis Luxury Cinemas, among others. It recently announced new tenants that include Pokewan, Pappalecco, and Medocino Farms.
  • Kilroy Realty's OnePaseo recently broke ground after an extensive community engagement process that spanned several years. This retail and mixed-use development is opposite the Del Mar Highlands Town Center, along Del Mar Heights Road. Plans for this site include 608 apartment units, 95,000 SF of retail, and 280,000 SF of office.

Some Analytics

General characteristics of the retail, apartments and hotel market help to place in context the local economics.

Retail

Overall, the San Diego retail market is quite strong:

  • Retail vacancy rate stands at 3.8% as of year-end 2016 (CoStar) 
  • Net absorption was positive 1.8 million SF for year-end 2016 (CoStar)
  • A total of 15 retail buildings with 93,250 SF of space were delivered with 655,708 SF still under construction at year-end 2016 (CoStar)
  • Of the 655,708 SF of inventory under construction, 91.4% has been pre-leased at year-end 2016 (CoStar)

Apartment

Likewise with the San Diego apartment market.  Here are a few key 5-year averages (CoStar):

  • Apartment vacancy rate: 4.3%
  • 12-month net absorption units: 2,767
  • 12-month deliveries: 2,737
  • Concessions: 0.5%
  • Cap rate: 5.4%

Hotel

And the San Diego hotel market is strong, too.  According to 2016 data from San Diego County Tourism, there were 34.3 million visitors to San Diego. More than 17.2 million stayed overnight; and more than 17.1 million were day visitors. Key hotel metrics:

  • Regional hotel occupancy remained at 76%
  • Downtown San Diego hotel occupancy was 80%
  • Average daily rates for the region: $158
  • RevPAR for the region: $120
  • 1,081 total hotel rooms are planned for downtown San Diego
  • A 6.5% supply increase is estimated to offset a 6% rise in demand

Impressions

Beyond the 266 days of sun (or maybe because of it) San Diego is an impressive market. What I learned both in my one-on-one conversations and at the ICSC San Diego event is that there is no Icarus in the market. While new downtown buildings reach high toward the sun, development generally appears to be along a carefully engineered arc that extends to the suburbs.

But I also had a lesson on time-space travel that caused me to think more about the implications for urban development. This came about while driving an average 25 mph for 15 miles in traffic congestion caused by both the time of day and a deluge of rain. This car-centric lifestyle presents an opportunity that I believe is captured by the projects in the East Village area of downtown San Diego (e.g., Makers Quarter) and in Kilroy's One Paseo along Del Mar Heights. Specifically, a closer integration of work, home, life and lifestyle.

Jerry L. Hoffman

Hoffman Strategy Group LLC, 4424 Hallcliffe Road, Lincoln, NE, 68516, United States

Jerry L. Hoffman is owner of Hoffman Strategy Group LLC, a firm nationally known for strategic development, economic analysis, and market location consultancy.