Orange County’s retail market posted more strong results in the third quarter.
The overall vacancy rate dropped 14% to 3.2% in the period. This decline in vacancy was a result of the nearly 134,000 square feet of positive absorption in the sector.
The average asking lease rate for retail space rose 13% to $2.35 per square foot in the period, versus a year earlier.
Though retail rates here are higher than in neighboring Southern California counties, the average rate fell 5 cents to $2.35 per square foot in the period versus the second quarter.
Some anxiety is being felt in the retail sector as to how current economic conditions and other factors will shape the market.
High fuel costs are a big concern on the minds of retailers and consumers. Gas prices were 30% higher than last year following Hurricane Katrina.
Recent national economic reports show that consumer confidence has decreased and the growth rate of retail spending has lessened. Local economic indicators show OC’s business outlook is good.
The 2 million square feet of construction under way includes projects such as The Strand in Huntington Beach, Orchard at Saddleback in Lake Forest and Anaheim Garden Walk in Anaheim.
Other projects such as Woodbury Village in Irvine and the redevelopment of the Tustin Marine base are some of the 2 million square feet planned for the next four years.
The rising cost of construction may have an impact on these projects. Higher costs for materials is offset by higher rental rates, but original development projections may need to be altered.
Vacancy
With no construction completed in the third quarter, the overall OC vacancy rate declined to a record 3.2% due to strong demand for shop space.
Redevelopment construction in some cities continued to take available retail space off the market while many tenants are looking towards higher density, mixed-use developments.
South and Central counties saw dramatic vacancy declines, while West County held the tightest rate of 2.7%.
Neighborhood and strip centers carried the lowest vacancy rates among retail types at 2.8%. Specialty centers posted the highest vacancy level at 5.5% in the third quarter.
Net Absorption
The OC market maintained a steady pace of absorption in the third quarter with about 134,000 square feet of positive absorption.
With the exception of the Central Coast, retail net absorption was positive in all submarkets. North County reported the biggest increase in activity from the prior quarter, with nearly 40,000 square feet of positive absorption.
Community and neighborhood centers generated the greatest amount of absorption of the center types, with 53,290 and 51,021 square feet of positive net absorption, respectively.
Following last year’s pace, 2005 is shaping up to be another solid year of retail activity with total absorption totaling 374,926 square feet.
Lease Rates
Average rental rates ended the third quarter at $2.35 per square foot.
Although the current lease rate is a decline from second quarter’s rate of $2.40 per square foot, it does represent a 13% increase compared to a year earlier.
Retail asking rents range from a low of $1 per square foot in North County to a high of $4 per square foot in the majority of center types in South County.
Specialty centers remained the hottest property type in the market as they’ve generated considerable foot traffic in the past few quarters.
This has given landlords of these destination properties the flexibility to raise lease prices to slightly less than $3 per square foot.
Construction
More than 2 million square feet of retail space is under construction. No new space was completed in the third quarter.
A lot of retail construction activity is the redevelopment of existing space. Cities and investors,faced with few large tracts of raw land to develop,have begun the process of making over existing centers in densely populated areas to attract upscale tenants and provide more tax revenue for the city.
The 279,000-square-foot Orchard at Saddleback and 165,000-square-foot Arbor in Lake Forest are expected to be finished in the fourth quarter or early next year.
Meanwhile, a 200,000-square-foot Costco center in La Habra is being redeveloped to transform an aging retail district at Beach Boulevard and Imperial Highway.
Not only has major construction picked up during the past year, but more than 2.5 million square feet of planned centers are in the pipeline and set to be finished in the next four years.
Analysis provided by CB Richard Ellis Group Inc.’s Information Management Department.
