By TIM MCMAHON
The prediction of a “crash” in retail real estate has not materialized.
But we are seeing a slight slowdown in the Orange County retail market. Although the market conditions have been incredibly strong for the past few years, we are beginning to see a change.
The overall vacancy in the third quarter has increased to 3.5% compared with second quarter’s 3.2% and last year’s 3.3%.
Power centers led the jump as the vacancy rate increased to 3.6% from 2.2% in the second quarter.
The contraction of the grocery supermarket industry is certainly a large factor in this segment.
The specialty center segment continues to improve especially in the “Main Street” style and mixed-use projects.
The vacancy rate has improved to 3.8% from 3.9% in the second quarter. It has improved greatly from the 4.8% in third quarter 2006.
Construction of specialty centers continues to be the strongest of all categories claiming more than 42% of construction in the third quarter.
Rents
The average asking lease rate has stayed relatively stable.
The rate increased about 2% year-to-year with a slight decline of less than 1% from the second quarter.
OC is still an incredibly strong retail market, but there are uncertainties on the horizon.
The overall economy is facing challenges from the worsening credit climate, the subprime mortgage meltdown and the recent stock market “roller coaster” ride.
How will this affect the Orange County retail market?
Are we immune to a major downturn?
As stated above, the statistics still show a healthy market with a low overall vacancy rate and reasonably stable rents.
The recent announcements of delayed projects in the Platinum Triangle area, Irvine and others will certainly affect the start of construction and absorption of retail development in those areas.
Moving Cautiously
Retailers in general still target OC for expansion, but are moving cautiously. For example, casual dining restaurants such as Chili’s, Macaroni Grill and El Torito are looking very carefully at their expansions. Many restaurants in this category are experiencing average unit sales declines.
One major factor contributing to this is the consumer’s lower disposable income due to increased mortgage and energy costs.
The OC retail market will have minor challenges, but our diverse economy and the much sought after “Orange County lifestyle” will help ensure the overall strength of the retail market.
McMahon is a senior vice president in the Anaheim office of CB Richard Ellis.
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