Real Estate Watch: Retail
Retail Set for Another Strong Year
By PHIL VOORHEES
Orange County’s retail market is set for another good showing this year following a strong 2002.
Retail vacancy rates declined in 2002 vs. a year earlier, with net absorption and lease rates posting an improvement.
Two main factors,the strength of the Southern California economy and a big decline in the amount of new retail projects under construction,promise to define OC’s retail market in 2003.
While the county’s economy has remained robust, it looks phenomenal when compared with the economic woes seen elsewhere.
National chains, from small-space occupiers such as Starbucks, Regis Salons, T-Mobile and Quiznos Subs to big-box retailers such as Lowe’s (three new locations), Kohl’s (two new stores) and Wal-Mart, must continue adding units to increase yearly revenue; improved profit margins alone will not meet investor expectations.
Seeking the highest return on investment, expect national chains to compete aggressively for Southern California locations, particularly in OC. Compared with languishing markets in other parts of the country, OC promises strong returns in a stable, desirable market.
At 2.1 million square feet, fourth-quarter construction activity was down 41% vs. a year earlier.
Lack of new retail space in the construction pipeline indicates a potential space shortage in the third and fourth quarters. Economists predict the economy should be growing at a rate of nearly 4% by then, as a result of various stimulus measures taken in the past several years.
Future projects such as the Tustin Marine base redevelopment (potentially about 600,000 square feet of retail space) will provide additional square footage, but not in large amounts for several years.
This is good news for owners of existing OC retail property. Last year, retail was a favorite for all types of investors who were attracted to the county’s stable, affluent demographics and tight controls on future development.
Rents should continue to increase and vacancies should drop significantly toward the end of the year.
Low interest rates have sellers enjoying record pricing; the 10-Year Treasury yield continues to hover around 4%, with spreads tightening to 155-175 basis points for “A” product.
Expect continued strong demand until interest rates rise (property values will decline in tandem) or the equity markets turn around and investors once again have alternative investments preferable to real estate.
Voorhees is a senior associate, retail investments, with the Private Client Group in the Newport Beach office of CB Richard Ellis.
