The amazing run for Orange County retail properties continues, and the market is responding with the biggest surge in development since the second quarter of 2003.
In the first quarter of 2004, OC had just 150,000 square feet of retail projects bigger than 50,000 square feet under construction. In the first quarter this year, construction jumped to nearly 1.4 million square feet.
The Plaza at San Clemente, set for 600,000 square feet, is the biggest retail center under construction.
Despite this huge jump in construction activity, the new space amounts to just a 2% increase in total retail inventory for OC.
Consequently, the additional square feet barely impacts a couple of trends influencing retail in OC.
Limited Retail Inventory
The OC retail market consists of about 77 million square feet of space, with 2.5 million square feet of construction remaining to be developed.
While the new development will create opportunities for tenants, the supply of fresh retail space now largely depends on redevelopment and reuse of obsolete properties.
The lack of retail supply is pushing up lease rates (tempered only slightly by the addition of new space) with a countywide asking rate of $2.28 per square foot in the first quarter.
Meanwhile, vacancy fell to 4.5%, versus 4.7% a year ago.
Dynamic Interest Rates
The fate of retail center values is linked to the unpredictable behavior of the 10-year Treasury yield. Despite a brief pop to nearly 4.6% earlier this year, the 10-year bond coasted back to about 4.1% by the third week of May, compared with 4.75% in mid-May last year.
Strong 1031 exchange demand and lack of available inventory for sale have driven cap rates to historically low levels, with small retail strip centers in OC trading for cap rates less than 6%.
Consequently, sale prices continue to set records. High rental rates, favorable financing fueled by low interest rates and decreasing lender spreads, and intense 1031 exchange demand have kept the OC retail market hot.
Investor demand is set to remain strong, but expect more properties to go on the market this year as sellers look to lock-in profits.
Analysis provided by CB Richard Ellis Group Inc.’s Information Management Department.
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