By PHIL VOORHEES
Orange County continues to enjoy strong retail fundamentals that make it among the top markets in the U.S.
Lack of available inventory for sale or lease is perhaps the biggest consequence of OC’s strong market.
The OC retail market consists of about 76.5 million square feet of space, with only 1 million square feet of new or renovated space under construction. And land exists for only another 2 million square feet of new retail space.
The result of limited supply is increasing absorption and lease rates, and decreasing vacancy.
Since the fourth quarter of 1999, vacancy rates in OC have fallen steadily from about 8% to a record low of 4.4% countywide.
In the past year, the central and west parts of the county saw the most dramatic drops in vacancy rates. Central County vacancy plummeted more than 47% to 4.8%, and West County dropped more than 35% to a county low of 3.3%.
Decreasing vacancies put major upward pressure on lease rates.
The average lease rate in OC surged to $2.29 per square foot, triple-net, in the fourth quarter, up 19.9% versus a year earlier.
The big jump in lease rates bodes well for landlords. The magnitude of this year-to-year increase is almost unheard of and promises to provide a hedge against decreasing property values for OC retail owners when interest rates eventually revert back to historic averages.
OC retail investments remain in high demand. The county was second to Hawaii in terms of dollars per square foot in sales last year.
OC’s $255 per square foot for major retail properties beat key markets such as San Francisco ($240 per square foot), San Diego ($205 per square foot) and Los Angeles ($190 per square foot).
Trading cap rates for major centers last year averaged 6.75% in OC. Strip and freestanding retail results were even more impressive, averaging about 6% with many above or approaching $600 per square foot.
Expect brisk deal volumes this year. Fence sitters in 2004 should seek to take advantage of still-low interest rates, record-low lender spreads and massive investor demand, which shows no signs of slowing this year. Accordingly, 1031 exchange activity will remain high and continue to drive pricing in the county’s retail market.
Voorhees is a first vice president, specializing in investment properties, in the Newport Beach office of CB Richard Ellis Group Inc.
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