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The Orange County retail market, which consists of about 140 million square feet of space, continues to thrive as it sees an overall vacancy rate of just 5.5 percent. With strong income demographics, an improving job market and a limited supply of retail property, Orange County continues to be a target for both retailers and investors.
As job growth is an indicator of a positive retail market due to increasing demand from the county’s consumer base, the positive data coming supports a well-held belief that the investor protects his or her downside risk by targeting ideally located retail property in Orange County. Through this, they benefit from consistent appreciation by virtue of owning retail property in a market characterized by very high barriers to entry.
In its 2013-2014 Economic Forecast & Industry Outlook, the Los Angeles County Economic Development Corp. says that the county’s job market over the next couple of years will be strong. It anticipates an increase of nearly 52,000 jobs. LAEDC also reports that retail jobs will increase, and that taxable retail sales reached $39.3 billion last year. Those sales are expected to reach $42 billion this year and $43.7 billion next year.
With that said, from an investment standpoint, cap rates here continue to be some of the lowest in the nation. Cap rates for smaller two- or three-tenant properties occupied by national retailers are in the 5 percent to 6 percent range. Single-tenant, triple-net leased properties remain the most hotly contested, and are lower than the small multi-tenant property cap rates — we have seen many sell in the 4 percent to 5 percent range recently. As single-tenant assets are harder to come by, investors are also flocking to multi-tenant assets that feature national credit tenants, as well as mom-and-pop stores. When an Orange County retail property is placed on the market, it tends to receive multiple offers within a short time period due to the overall lack of retail investment property supply. Not only is this common, but all-cash offers are as well.
From a leasing perspective, rental rates are expected to rise slightly this year. According to CoStar, the largest lease signings that occurred in the first quarter of this year included: the 13,477-square-foot-lease signed by Smart & Final at Doheny Village Center; the 9,998-square-foot-deal signed by Buca di Beppo at One Pacific Plaza; and the 9,109-square-foot-lease signed by Crunch Fitness at Marina Village.
As Orange County residents continue to demand more variety and new concepts, we believe a diversity of new-to-the-market retailers and dining options will come to the area in the months ahead.
— Matthew Mousavi, managing director, Faris Lee Investment's Irvine, Calif. office