Q1 2025 San Diego Retail Market Report

Highlights

• The retail market in San Diego is shifting due to store closures and bankruptcies, resulting in increased available space. However, the market’s inventory overall remains tight in comparison to previous years.
• San Diego’s retail pipeline contains around 510,000 square feet of space under construction, accounting for 0.4% of existing inventory.
• Although worries regarding inflation, tariffs, and consumer spending capacity are rising, a shortage of overall available retail space and a decrease in construction starts should make room for an orderly backfilling of store closures, reducing availability by the end of the year.

San Diego Demographics

• Unemployment Rate: 4.7%
• Current Population: 3,291,397
• Households: 1,191,687
• Median Household Income: $107,690

Market Performance

San Diego’s retail market is experiencing shifts due to recent store closures and bankruptcies across the region, resulting in an increase in available space. However, the overall market for retail space remains tight, particularly in prime locations, even as the availability of mid-sized boxes in malls and power centers opens up fresh opportunities for retailers to expand. Macy’s, Joann, Kohl’s, and Party City are among the latest store closures spanning Chula Vista to Escondido.

Rent growth has slowed from its peak of 4.9% in mid-2023, to now 2.4%, this has occurred as local inflation has reduced with consumer growth in a high-cost operational environment. Market participants notice landlords have become increasingly selective regarding tenant selection and typically have more negotiating power. Free rent is often only extended to businesses who finish their build-outs ahead of schedule, ensuring early occupancy.

By the Numbers

• Sales Volume: $198M
• Cap Rate: 5.7%
• Market Sale Price Per SF: $398
• Vacancy Rate: 4.2%
• Rent Growth: 2.4%
• Market Asking Rent Per SF: $36.24
• SF Under Construction: 499K
• SF Delivered: (121K)
• SF Absorbed: (385K) | Q1 2025 | Source: CoStar Group

Construction

San Diego’s retail pipeline includes around 570,000 square feet of space under construction, accounting for 0.4% of existing inventory. Market participants have highlighted that higher-and-better use for retail properties frequently leads to housing or mixed-use development, and some estimates indicate that local retail rents must climb by up to 40% to make such ventures viable.

Sales

Sales volume over the last four quarters was consistent with the average level between 2015 and 2019. Institutional and REIT capital sources accounted for 25% of the purchase volume in the last year. These sources accounted for over half of the seller’s volume. Fund-level equity was largely absent from the investing landscape, with private groups dominating activity on the buy side. Market participants report that cap rates at retail centers have not generally increased in tandem with interest rates, despite the fact that more shopping malls have sold in recent quarters than the previous year. Overall, cap rates have remained reasonably stable, ranging between 5% and 6.5%, comparable to early 2022 levels.