The Orange County retail market remains active due to declining vacancies and increasing job creation and housing starts. As a result, enthusiasm was evident at the recent ICSC Western Division Conference in San Diego, as industry colleagues discussed opportunities and challenges associated with the strength of the local market.
There has been very little new development recently in Orange County, which has seen more than 3 million square feet of vacant space absorbed since 2011, according to CoStar. There continues to be an unbelievable demand for retail investment properties, while the Fed’s announcement to maintain existing interest rates will only increase competition in this limited market.
A dynamic investment market offers both challenges and opportunities for retail leasing.
Limited local new development is directly connected to continued instability among major grocery stores and big-box retailers. We might never see another ground-up traditional power center again because of post-recession downsizing and shakeouts among major retailers. While many of the major national retailers remain active, the focus has turned to expansion in smaller urban environments, which are limited in Orange County.
Grocery-anchored daily needs centers remain a Class A asset type, though instability within the local grocery sector continues to challenge the industry. Recent announcements of store closings by Haggen and Fresh & Easy surprised, but did not stun, most. Local experts understand breaking into the Southern California market is no easy feat. That said, this competitive but extremely lucrative market is difficult to ignore. The industry has now turned its focus to the likes of Aldi and Grocery Outlet, which plan to expand aggressively in the coming months.
Limited new development remains a fantastic opportunity for savvy owners that have been able to capitalize on existing, well-positioned assets. Five- and 10-year leases coming due are allowing owners to transition spaces that were previously leased at below-market rents. There remains heavy competition among national credit tenants for properties positioned at “Main and Main.”
Creative owners of under-performing but well-located assets have also found opportunities strategically repositioning properties to adapt to the changing needs of the consumer. There are a number of multi-tenant centers that have been successfully converted to specialty centers in Orange County. One example is the Triangle in Costa Mesa, which has nearly completed a major repositioning effort into a dining and entertainment hub. It is integral to stay ahead of the curve and adapt to the changing needs of the consumer, given the rapidly changing retail and technology industries.
Local shopping centers in lower-income demographic trade areas are more challenged due to the heavy expansion that took place among discount retailers. Many of these retailers, specifically national players like 99 Cents Only and Dollar Tree, remain positive drivers. There are select areas struggling with an over-abundance of value-oriented retailers, however. This makes it more difficult to re-lease junior box space when a center is left with a vacated Anna’s Linens or Office Depot, for example.
Today’s consumer is generally spending more on a monthly basis, which is positively affecting retailers at a measured pace. Tenants operate at slim margins, but if consumer spending continues to increase, the industry should be able to push rents and drive value over the upcoming quarters.
By Matt Hammond, Director of Retail Brokerage, Coreland Companies in Tustin. This article originally appeared in the October 2015 issue of Western Real Estate Business magazine.