Market struggling amid rising unemployment.

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The retail sector continues to struggle as consumer confidence remains relatively low. Until the job market perks up, Orange County residents will maintain low levels of spending. This nervous sentiment has crossed over to prospective investors in retail properties because of the potential for weak cash flow.

Leasing activity is at a virtual standstill, with no anticipated movement for at least the next 6 to 9 months. With the exception of Kohl’s and Forever 21 leasing up former Mervyn’s stores and Marshalls taking up large space at previously occupied locations, most of the vacated big box spaces are sitting empty. As of August, the Orange County vacancy rate increased to 7.7 percent, up 8 percent from the previous quarter. Further evidence of a weak market, the average asking rent declined $0.05 to $2.56 per square foot from the previous quarter.

Sales activity during the third quarter has lacked large trendsetting transactions. Due to rising vacancies and declining rental rates, potential investors have been hesitant to acquire large properties; this explains why most of the deals have been small or mid-sized. Cap rates have shifted from 5 percent during the market peak in 2007 to 8 percent or higher for large, national credit tenants. Today’s investors are seeking quick-to-close, all-cash deals, although they are still holding out for better bargains. Once more bank-owned properties enter the market, competition could arise among investors.

The retail sector will remain soft until the unemployment rate improves, allowing consumer spending to increase. This will make retail properties more attractive to investors. On a positive note, not a lot of distressed assets have entered the market, financing options are still available and the hospitality sector has seen an up-tick in the number of advanced bookings. This all bodes well for Orange County retail.

— Maurice Nieman is a vice president in Colliers International’s Irvine, California, office.

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