The ramifications of September 11 and subsequent extremist acts around the globe are hurting San Diego retail.

Concern about terrorism has led to intensified security at the U.S.-Mexico border, and that, in turn, has led to long lines, discouraging Mexican shoppers from entering the U.S. The cost to San Diego County businesses is high: about $1.3 billion annually in direct retail sales, according to a new report from the San Diego Association of Governments (SANDAG).

Taking into account the indirect impact on other related businesses, such as spending by suppliers to retail, food service and hospitality sectors and their employees, SANDAG estimates increased border delays are costing the region up to $2.5 billion annually, including a loss of 28,000 to 35,000 jobs.

“The amount of business from the other side of the border is pretty important and an integral part of total sales,” says Mike Moser, senior vice president for retail in CB Richard Ellis' San Diego office.

Affected are Indiana-based Simon Property Group's Fashion Valley, an upscale south county mall, which depends on Mexicans for about a quarter of its sales, according to the mall's marketing person, and Chula Vista, which also has a higher percentage of foreign shoppers, according to Steve Avoyer, a principal at the San Diego-based retail brokerage firm Flocke & Avoyer Commercial Real Estate. Simon executives were not available for further comment. Calexico in the Imperial Valley also has taken a hit, as a large number of Mexicans from the Tecate area, home to a growing number of maquiladoras (manufacturing businesses operated by U.S. companies), shopped regularly for groceries and other essentials, and now shop at home rather than fight border traffic, Avoyer says, noting that a Von's grocery store in Calexico closed in the wake of increased border security following September 11.

The SANDAG study is the first to try to scientifically quantify the economic impact of lost revenue from cross-border travel, says Elisa Arias, project manager for the report. She says the study provides local officials with ammunition they can use to lobby Congress for security policies that speed up rather than slow movement across the border.

Not all the news is bad, however. Brokers report steady interest in retail property and a number of new projects are under way. (See sidebar on page 150.)

Wealthy Mexicans have discretionary income to spend. The study notes that an estimated 8 percent of border-town Tijuana's 2 million residents earn more than $100,000 annually. With this city's population expected to reach over 3.8 million by 2020 and an increasing number of Californians moving to Baja to find reasonably priced housing, border traffic is expected to increase dramatically over the next decade.

SANDAG's figures are based on a survey of 3,600 border crossers at the San Ysidro, Otay Mesa and Tecate stations, which suggest a loss of 2 million shopping visits annually. The official average wait at the three ports of entry is now 45 minutes, but Arias notes that in reality, wait times are unpredictable, and longer waits are more likely to deter shoppers than those crossing the border for work or school.

She notes that a 15-minute increase in border wait time costs the bi-national border economy an additional $1 billion annually.

Border Patrol data obtained by Kenn Morris, director of the University of California San Diego Cross Border Innovation program at San Diego Dialogue, shows that traffic dropped to 60 million trips in 2004 from about 63 million trips in 2003. He attributes the decline to big boxes, including Home Depot, Costco and Wal-Mart, opening on the Mexican side of the border, and increased wait times, which caused Mexican shoppers who may have previously crossed three or four times weekly to do all their shopping in two to three trips.

But even 60 million trips yearly is still a healthy number, equivalent to the total number of passengers using Los Angeles Airport. “No one knows what would happen if wait times decreased, but the retail impact would be dramatic,” says Morris.

He warns, however, that waits would no doubt increase dramatically if the Homeland Security carries out proposed border policies without increasing staffing, implementing smart security technologies and improving infrastructure.

Noting that San Diego's aging border stations were not built to handle today's traffic load, he says that Homeland Security is planning to implement an inspection program for southbound traffic to track the return of Mexican nationals to Mexico. This program is being tested at three or four ports of entry, none of which have the high volume of traffic experienced at San Diego's border. Southbound inspections would not only add another 20 minutes to 40 minutes to a trip and further deter Mexican shoppers, it would also double the processing load at the border to 120,000 trips a day, which Morris says could bring border traffic to a grinding halt.

Recently, two additional Secure Electronic Network for Travelers Rapid Inspection (SENTRI) lanes were opened at the San Ysidro border. These lanes were created to move prescreened Mexican crossers through the border quickly. But instead of adding two more lanes, two general crossing lanes were used to create the new SENTRI lanes, which caused the average wait for the non-prescreened public to increase to about an hour and a half, says Morris.

“The threat to retailers caused by future security inspections and border requirements are real and could impact border communities on the scale of hundreds of millions of dollars in lost revenue if measures are not implemented in a smart way,” Morris adds. “Already we see delays of more than 30 minutes at some of the expedited SENTRI border crossing lanes,” he adds.

The long wait is also impacting the Mexican side of the border, with a decline of about 2 million trips yearly, resulting in a loss of about $120 million in revenue and 1,300 jobs. But a bigger worry for Baja businesses is the proposed U.S. passport requirement, which could require all Americans traveling across the border to show a passport.

Baja, Calif., is in Mexico and you have to cross the border to get there. The passport-by-sea requirement will hit Ensenada hard, as that's a regular port of call for Princess Cruise Lines, which is a big boon to that city's economy.

Currently, only 20 percent of Americans have a passport, according the U.S. State Department, which will mean fewer tourists crossing into Mexico and spending money.

Based on surveys of U.S. residents returning from Baja, people spend on average $144 each per trip traveling to Baja destinations. With 104,915 visitors entering Baja every day, the bottom-line impact is estimated at up to $2.7 billion annually, which is a significant portion of the region's $15 billion GNP.

But the passport issue will be felt on this side of the border, too, notes Ryan Singer, an economist at the San Diego Regional Chamber of Commerce's Economic Research Bureau.

Israel Adato, president of the Ysidro Chamber of Commerce, worries too that it will scare off investors interested in opening businesses near the border. He says that business people are already apprehensive about signing leases in the area.

A secure ID card, similar to the SENTRI card, may be issued to frequent U.S. border crossers to be used in place of a passport, according U.S. State Department spokesperson Steve Pike. However, this program would not affect tourist traffic. Some members of the business community favor issuing “smart” cards, with biometric information embedded, such as a thumbprint or retina, in lieu of passports. These cards would be similar to applying for a driver's license and could be electronically scanned at the border for positive identification.

“We're trying to work with Sacramento and Washington to put off the passport issue,” says Singer, “and are encouraging frequent crossers to pre-register for SENTRI cards to cut the wait time.”

“Tourism will definitely be affected if passports are required,” stresses Viviana Ibanez, manager of bi-national affairs at the San Diego Regional Chamber's Mexico Business Center. “I don't think elected officials are aware of the great impact the border has on our economy. What SANDAG did will hopefully help us in Washington, D.C., when we go there to ask for funds for more infrastructure,” she adds, noting that another port of entry is need, as well as improvements to the existing ones. “Now we have documentation that shows what will happen if the flow of traffic at the border stops.”

At press time, U.S. State Department officials were reviewing the proposed schedule for implementing the passport law, which was to take place in three phases. Pike says there may be changes in the deadlines for executing phases of the law, however. The initiative, which was part of the Intelligence Reform and Terrorism Prevention Act of 2004, must be fully accomplished by Jan. 1, 2008. And it would take an act of Congress to change that, he says, noting that Congress would have to pass new legislation to reverse the law, which is unlikely.

Gerrick Taylor, director of Policy Development for the Border Trade Alliance, says, “There's a lot of behind the scenes negotiating going on between the travel industry and State Department about how the initiative will move forward.”

Market Profile/San Diego

DEMOGRAPHIC OVERVIEW

  • Population: 2,930,000 (2003)
  • Medium household income: $47,067 (1999)
  • Retail vacancy rate: 2.1%
  • Average rent: $1.98 a square foot
  • Unemployment: 3.8%
  • Under construction: 1 million square feet
  • Total retail stock: 57 million square feet

Source: CB Richard Ellis Q2 2005, Census Bureau

San Diego's Sunny Side

Despite the drop in border crossings, brokers say they are experiencing a boon in retail interest in San Diego, thanks to the city's rapid growth, according to Pete Bethea, senior vice president of San Diego-based Burnham Real Estate.

He says rents are steadily rising, and sales climbed 10 percent during the last quarter at San Ysidro's Shops at Plaza Las Americas, a 370,000-square-foot upscale outlet mall jointly owned by California-based Pacific Coast Capital and Pennsylvania-based Stoltz Real Estate Fund. At Developer Diversified Realty's 175,000-square-foot San Ysidro Village (formerly San Diego Factory Outlet Mall), new Ross and Marshall's stores exceeded first-year projections and recorded sales competitive with other San Diego stores.

In fact, the San Diego retail market overall has consistently outperformed the rest of California and the nation, according to a report by CB Richard Ellis (CBRE). The region's retail vacancy is currently the lowest in the nation at 2.1 percent, and average asking rents increased from $1.91 per square foot in the first quarter to $1.98 per square foot in the second quarter, or $23.76 on an annual basis.

“Mexican shoppers are important to the San Diego economy, there's no doubt about it,” says George Whalin, a San Diego-based retail consultant. “But the impact is more anecdotal in nature than substantial.” He notes that crossing is much better today than right after September 11, and suggests that Mexicans know the best times to cross and will continue to shop in San Diego.

Even with losses associated with overcrowded border stations, CBRE's senior vice president for retail Mike Moser acknowledges that San Diego retail is growing. He suggests that growth from shoppers on the U.S. side of the border has helped overcome the negative impact longer waits have had on Mexican shopping visits. He admits, however, that there could be potential for more sales if barriers to crossing the border improved. “Major retailers base decisions on market demographics on this side of the border, but Mexican sales are definitely a bonus,” he says.

Currently, more than 1 million square feet of retail space is under construction, with big-box development dominating, according to a Marcus & Millichap report. However, a plethora of new retail is going up in downtown San Diego in conjunction with new residential development there, as well as two new lifestyle centers, a 350,000-square-foot specialty center by Washington, D.C-based Madison Marquette across the street from the Padre's Ballpark, and a community lifestyle in the historic East Village area, which is part of a new six-block master-planned community. Additionally, the city is planning to expand commercial space at the historic Seaport Village on the waterfront, repositioning the old police headquarters buildings to 190,000 square feet of commercial space and adding a new park and plaza areas.

Last year, private developer San Diego-based Sudberry Properties completed Eastlake Village Marketplace in Chula Vista, a 410,000-square-foot community center anchored by Target and Lowe's, with a lifestyle component. The firm is also getting ready to break ground on an adjacent 157,000-square-foot, upscale, open-air specialty center that will be anchored by a Trader Joe's and bookstore and includes very high-end restaurants and boutiques.

Noting that the Eastlake area of Chula Vista is about 15 minutes from the border, Colton Sudberry, the firm's vice president, says the existing center does not have a Mexican clientele, but that is expected to change with completion of State Highway 25, a new north-south freeway that will connect with Interstate 8, which runs south to the San Ysidro border station.

“From a developer and owner standpoint, the retail market couldn't be any better,” he says, contending that if poorly located, older retail stock is taken out of the equation, occupancy is virtually 100 percent and rents continue to rise.