By Terrison Quinn, Managing Principal, SRS Real Estate Partners
Despite the headwinds facing the Orange County retail property sector in 2021, retailers experienced record sales, while shopping center owners realized all-time-high property values. Orange County’s retail vacancy rate also decreased in 2021 from 4.58 percent to 4.32 percent as compared to 2020, according to CoStar. Meanwhile, rents increased from $33.12 per square foot, per year to $34.55 per square foot, per year — back to pre-pandemic levels.
Terrison Quinn, Managing Principal, SRS Real Estate Partners
There are many reasons for these impressive numbers, though less stringent COVID rules and the solid job market may be two key drivers. Orange County remained less restrictive on businesses than neighboring Los Angeles County. The county also seems to have been the economic benefactor given the less severe climb out of the vacancy and unemployment challenges that were experienced through the pandemic.
Orange County’s job market was hit hard during the pandemic with its large employment base in hospitality and leisure. However, it bounced back quickly with Disneyland re-opening and others hiring thousands of workers amongst robust consumer demand. Orange County’s job market is also recognized as one of the more diverse and higher paying counties in Southern California.
Investors Continue to Eye Orange County as the Gold Standard
Overall, investor demand remains strong, especially for grocery-anchored retail centers and drive-thru restaurants in all Orange County submarkets. Cap rates are hovering around 5.11 percent, a slight decrease from 12 months ago. Single-tenant retail assets, particularly those with long-term credit tenant triple-net leases, continue to achieve record-low cap rates. Most notably, Sunbelt Holdings purchased the 225,000-square-foot Home Depot in Anaheim for $53 million, at about a 4.5 percent cap rate.
In 2021, Blackstone was the largest buyer of Orange County retail, acquiring nearly $275 million in shopping center assets. The largest seller last year was Merlone Geier, disposing of more than $375 million in retail real estate.
Tenants Thrive
Some of the more active tenants — or tenants that absorbed the most space over recent months — include Target, At Home, Amazon Fresh, Planet Fitness, EOS Fitness, Raising Cane’s, Starbucks and Lifetime Fitness. The drive-thru restaurant segment continued aggressive growth throughout 2021 with ground-lease and build-to-suit rents hitting record highs following the huge success of restaurants like Raising Cane’s, Chick Fil-A, In-N-Out and Starbucks during and post-COVID.
Over the past 12 months, sit-down restaurants have experienced a surge in demand for both dine-in and delivery business, many of which have now exceeded pre-pandemic sales thresholds. Cities like San Clemente, Fullerton and Huntington Beach are considering following Laguna Beach’s lead by making some of the temporary promenades that were permitted during COVID into permanent structures.
Many would have expected a different outcome at this point for Orange County retail, given the seemingly insurmountable challenges that COVID, high inflation, bottle-necked supply chains and labor shortages have caused. The resiliency of retail continues to shine bright as retailers, investors and developers adapt to new and evolving retailing strategies. This doesn’t mean there won’t be bumps in the road ahead, but those who are playing the long game for Orange County retail will continue to be well positioned. So, with that I say…keep calm and carry on!