San Diego

Demographic Overview

Population: 2.9 Million

Rate of Population Growth: 2%

Median Household Income: $60,100

Unemployment Rate: 4.2%

Retail Overview

2002 Retail Completions: 2.8 million sq. ft.

Retail Vacancy Level 2002: 4.9%

Retail Vacancy Level 2001: 4.4%

Average Rent Per Square Foot 2002: $21.11

Average Rent Per Square Foot 2001: $20.56

Source: California State Department of Finance, San Diego Regional Chamber of Commerce, Marcus & Millichap

In 1993, San Diego's Naval Training Center was home to one-sixth of the U.S. naval fleet. The base employed 133,000 military personnel and 30,000 civilians, and contributed about $80 million to the local economy annually. Each year, 28,000 visitors to the base generated an additional $7 million in spillover revenue.

Also in 1993, the federal government's Base Realignment and Closure Commission decided the Naval Training Center would be shuttered. It ceased operation in 1997.

A base closing of such magnitude sounds like a recipe for disaster. But not in San Diego. The municipality began leasing portions of the Naval Training Center in 1995, carefully replacing military functions with government offices, small businesses and nonprofit organizations. In 2001, the city moved out those tenants to remake the site as a mixed-use complex, with 350 residential units, 400,000 square feet of office space, 1,000 hotel rooms and village retail, as well as amenities for the public and tourists, such as parks. Reopening is scheduled for this year.

This is just one example of San Diego's disciplined transition to a more diversified economy. Military-related activities used to account for 30 percent of the local economy; today they make up less than 10 percent, according to the San Diego Association of Governments. And the results are paying off handsomely. “San Diego's economy is so diverse — not that we haven't been hit — but we're faring much better than most of the country,” says Barbara Kreis with brokerage firm Sperry Van Ness.

High-tech and biotech development, as well as tourism, international trade and education, provide balance where once there were submarines. Together they help buoy San Diego's regional real estate market.

Gross regional product rose 6.5 percent in 2001, to $117.3 billion, and was expected to have increased by another 5 percent in 2002, according to the regional Chamber of Commerce.

The city's 2.92 million residents reap the benefits. The current unemployment rate is just 4.2 percent, compared to 6 percent for the state and the country. Median annual income is $60,000, well above the national average.

Retailers have noticed. Lease rates, retail net absorption and permits are all up, Kreis says. Colliers International reports that rents range from $17 to $26 per square foot for community centers, $16 to $24 per square foot for neighborhood centers and $18 to $28 per square foot for specialty locations. Overall vacancy is about 5 percent.

With regard to investment, Kreis reports that the overall market saw 17 transactions involving larger centers and 125 involving smaller properties from January through November 2002, with an emphasis on grocery- and drug store-anchored community centers. Because of all the activity, the average cap rate dropped from 10.9 percent to 9.27 percent; the average price meanwhile rose $20 per square foot to $132 per square foot.

Much of the new construction, says Kreis, is in the newer suburbs. Chula Vista-Eastlake and Temecula-Murietta, for example, are prime locations. But the big news is happening in downtown San Diego itself. Once merely, “what the Navy left behind,” as Kreis put it, is now where more than $300 million in new retail is being built.

The Downtown San Diego Partnership reports that retailers have set their sights on the Gaslamp Quarter, the district of restored Victorian-era buildings and gas streetlamps that is already a retail and entertainment destination. Most developments are mixed-use projects combining retail with hotel, residential or office uses.

Robert Champion, chief executive of Champion Development Group in Los Angeles, says the turnaround far exceeded his expectations when he bought a full downtown block in 1998 to create Gaslamp Square, a $100 million, 280,000-square-foot project comprising 200 apartments, parking for 550 vehicles and 65,000 square feet of retail. Slated for completion this year, the project has leased 14,000 square feet to restaurant Ocean Air Seafood Room and surf store Quicksilver Boardriders Club.

“I bought the block because the Gaslamp District was the city's No. 1 nightlife attraction, but there was no daytime presence,” says Champion. He adds that daytime retailing is especially promising as downtown San Diego experiences an influx of residents. Champion estimates the current downtown residential base at about 20,000, with another 30,000 people expected by 2020.

Other downtown efforts include a massive redevelopment plans around the 57-storefront Seaport Village, now owned by GMS Realty (which hopes to win the development contract); three projects totaling $42 million by Oliver MacMillane; a $15 million adaptive reuse project by American National Investments, and $31 million of development by CIM Group involving two historic stores, the Woolworth and the Kress. All but Hollywood's CIM are locally based development companies.

“In the last five to eight years, the whole city has reinvented itself,” says Kreis. “We can now support all the major retailers. We're a little bit light on the real high-end merchandiser, but the expectation is that as downtown gets repopulated, those retailers will follow.”