By PETER MOERSCH
They said it wouldn’t last. But the boom market did.
Through the fourth quarter, vacancy rates had fallen to 3.2% across all retail properties in Orange County. That’s a startling drop of 27% compared to a year earlier.
Meanwhile, rents continued to rise through all segments except in North County.
Headlines covering the first minor drop in local residential real estate values have just appeared. The experts are cautiously predicting that commercial rents will soon follow. They’re hinting that the long-discussed bubble may be leaking if not bursting.
New commercial space in the pipeline is expected to increase the vacancy rate as well.
But the key factor remains: Most of the space coming to market already is fully leased. Further, rents will continue to increase significantly due to the rising costs of construction and the generally higher quality detail that developers are adding to create a class A project.
Mixed-use and lifestyle projects also are commanding higher rents as they begin to dominate the retail market.
When all factors are considered, rents should continue to rise and vacancy should continue to drop at high-quality retail developments.
Another factor is that most properties that had potential have upgraded their appearance, with rents rising as a result.
Those that have not improved won’t benefit from the lower vacancy to the extent that it will at newer and more modern retail centers.
As demand continues to outstrip supply, overall vacancy will keep declining with rents rising. Look for the average rent to increase across the board in most properties as the market rent is driven up when landlords compare new property pricing to the current rent rolls.
Strip centers will benefit most from this trend as visibility and identity for smaller tenants once again become a primary concern. Vacancy rates in the segment are hovering at about 2% and falling.
Can the market continue to record these results? The experts say no. But many of those experts have been eating their words for several quarters and the data supports the contrary.
Moersch is a vice president in the Anaheim office of CB Richard Ellis Group Inc.
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