By JEFF MOORE
The second quarter showed some positive signs for Orange County retail.
Average lease rates actually increased slightly to $2.71 per square foot. Vacancy rates dropped modestly to 4.2%. Net absorption went from a negative number in the first quarter to a positive 210,736 square feet.
Although construction activity dropped to just less than 1 million square feet under construction, completions increased to 537,600 square feet.
These completed projects included the Anaheim GardenWalk retail component for 439,000 square feet and The Strand in Huntington Beach for 98,000 square feet. Projects under construction include Pacific City in Huntington Beach and Marblehead in San Clemente.
Retail sales in the second quarter were buoyed by the government stimulus checks that were sent out in May and later, which totaled about $92 billion in rebate payments to people around the country. Those checks helped offset rising gasoline prices and an unstable economy. According to media reports, the overall economy grew at an annual rate of 1.9% from April to June, which can be partly attributed to these rebates.
Cutting Back
Since using their rebate checks, people have begun to again cut back on purchases. Consumer spending is the primary driver of retail sales and buyers’ confidence is shaky right now. High energy and food prices are decreasing disposable income. These increased costs, combined with the recent stock market upheaval and declining home values, have people spending cautiously.
The bottom line is that most people are forgoing luxury items. Many people are skipping vacations that require plane rides or long road trips. Instead, families are taking “staycations,” or staying closer to home.
Because of these trends, general merchandise and discount retailers have fared relatively well compared to home furnishing, building products and electronics retailers. The restaurant industry also has been negatively impacted. But perhaps no one has felt the hurt more than auto dealerships. Sales activity for automakers is at the lowest level in 16 years. Big ticket purchases and discretionary spending for consumers is on hold.
In both the leasing and capital markets, the number of transactions is down from previous years. There are fewer retailers actively expanding and many are pushing store openings to next year or beyond. The issues facing our capital markets continue to affect retail investment sales. The lending requirements are more stringent. The result is fewer leveraged deals are occurring and capitalization rates are rising, although they are still well below the 30-year historic average for OC. In addition, buyers and sellers continue to have different expectations on prices. Cash buyers have the advantage and are thriving.
Despite all this uncertainty in the market, the fundamentals for retail remain strong. We continue to have low vacancy rates, positive absorption, good demographics for retailers and remain a desirable place for people to live and work. More than 3 million people live here and these people need to eat, drive their cars and buy goods and services from retailers.
In uncertain times, there is a general “flight to quality.” Retailers need to grow or die and well positioned properties in OC should continue to thrive as retailers focus on strategic locations to expand.
Everyone in our industry needs to adapt with these changing times. It’s not business as usual,but opportunities exist. Someone I respect shared a quote with me that I love: “Don’t try to avoid the storm. Learn how to work in the rain.”
Moore is senior managing director in the Newport Beach office of CB Richard Ellis Group Inc
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