— By John R. Read, senior vice president, CBRE Retail Investment Properties-West —
Undoubtedly, 2023 proved to be a volatile year. It was marked by persistent inflationary pressures, four 25-basis-point interest rate hikes by the Fed and a surge in the 10-year U.S. Treasury yield (from the high 3 percent range in January to peak levels near 5 percent in October). These changes had a pronounced impact on retail real estate investors, businesses occupying retail centers and consumers who frequented these establishments.
The real estate sector particularly grappled with the cost of financing in an environment of higher interest rates. While these challenges did temper Orange County’s retail market to some extent, it largely remained resilient due to its strong underlying fundamentals. These include a substantial population of high-income earners, flourishing industries like tourism and destination-oriented shopping centers, as well as a supply constrained retail property base with limited large-scale retail development.
The unemployment rate in Orange County remained steady at 3.8 percent in December 2023, unchanged from November’s revised rate. This rate is notably higher than the year-ago estimate of 2.7 percent. In comparison, California’s unemployment rate stands at 5.1 percent rate, while the national rate during the same period is 3.5 percent. Between December 2022 and December 2023, total non-farm employment increased by 36,300 jobs. The sectors contributing to this growth were leisure and hospitality, followed by private education and health services. Combined, these sectors account for 58 percent of the year-over increase.
Many of the newly created jobs in Orange County have a direct or ancillary connection to various retail activities. This connection further strengthens Orange County’s retail market, pushing net absorption back into positive territory. Much of this is driven by large lease deals in the fourth quarter of 2023. Larger-scale lease transactions completed in Orange County last year include a wide range of retailers like 99 Ranch Market, Marshalls, Savers, Goodwill, 24 Hour Fitness, EOS Fitness, Crunch Fitness, Bowlero, Barnes & Noble and others. Interestingly, what were historically concerning retail “box” vacancies — often associated with failing or shrinking retailers — are now viewed as opportunities to enhance rents and tenancy, particularly in robust markets like Orange County.
With a limited supply of new product and ongoing tenant demand, Orange County retail rents and vacancy rates have remained stable. Average asking lease rates on a triple-net basis rose $0.04 quarter over quarter to $2.97 per square foot — an increase of $0.07 since the start of 2023 — with some submarkets well exceeding $3 per square foot. Orange County’s vacancy rate remained virtually flat in the third quarter of 2023, at 4.4 percent countywide.
These established fundamentals drove retail investor interest and some significant sale transactions despite last year’s volatile capital markets environment, which dampened investment sale transaction volume. Some noteworthy large-scale transactions include SOCO ($110 million), Buena Park Place ($53 million), Kaleidoscope ($33.5 million) and Nohl Plaza ($25.3 million), in addition to many more smaller-scale transactions. Our CBRE Retail Investment Properties-West team sold a Chick-fil-A in Mission Viejo for $8.6 million at a 3.76 percent cap rate in 2023. We currently have four Orange County retail assets available in the market, from repositioning opportunities to stabilized centers and single-tenant net-leased assets, all of which are experiencing substantial interest.
No one has a crystal ball for what 2024 and beyond will look like, but the market is entering 2024 with much more optimism. This is due to the Fed halting rate increases for the time being (and talks about potential rate decreases this year), the recent approximate 100-basis-point pullback in the 10-year Treasury yield and better-than-expected holiday sales activity that signals a resilient consumer. If your mindset is “glass half full” versus “glass half empty,” and you’re looking for a market that is resilient no matter what lies ahead, drink up some Orange (County) juice. It is definitely worth the squeeze.