By Joseph Cesta
Although Orange County’s retail market will soften somewhat through 2008, the long-term outlook remains favorable, supported by an affluent population and a concentration of high-paying employers.
During the past year, the sagging housing market has reduced consumer spending and contributed to job losses, especially in the financial activities sector. Subsequently, retail sales growth in the second quarter slowed to just 0.8% year-over-year, compared with 4% a year earlier.
As such, vacancy has crept higher, encouraging some owners to increase leasing incentives, particularly in unanchored strip centers and specialty stores. Marketwide vacancy remains one of the lowest rates in Southern California, which should support modest rent gains in the coming quarters.
Building activity is expected to slow this year as some retailers delay expansion plans. In Anaheim’s Platinum Triangle, construction at the mixed-use A-Town project halted late in 2007 due to market conditions.
By the numbers, employers are forecast to reduce payrolls by 14,000 positions this year, a 0.9% decrease, after 23,000 jobs were cut in 2007. Retail construction is projected to slow this year to about 1 million square feet, down from the 1.3 million square feet delivered in 2007.
Vacancy is expected to climb 150 basis points to 6.2% in 2008, following a 100 basis point increase the prior year. Rising vacancy rates are primarily attributable to reduced consumer spending.
Rise in Rents, Sale Prices
Rents will continue to advance this year, although at a more measured pace than in 2007, as cooling economic conditions ease tenant demand. Asking rents are forecast to gain 1.6% to $2.67 per square foot per month in 2008, while effective rents inch up 0.5% to $2.43 per square foot.
As 1031-exchange buyers take a less active role, single-tenant retail sales activity continues to cool in the area, falling 18% during the past year. Despite a 47% slowdown in restaurant deals, the median price for this type of space has increased 6% to $445 per square foot year-over-year.
Much of the rise can be attributed to some smaller properties on the coast changing hands. Given OC’s supply constraints, single-tenant assets across the area will continue to attract cash-heavy investors, though velocity will remain subdued as a result of less 1031-exchange money in the market. Buyers may want to explore opportunities near infill masterplanned communities in the wealthy Mission Viejo and Aliso Viejo areas.
Due to a gap between the expectations of buyers and sellers, activity in the multitenant retail sector has decreased by 73% during the past 12 months. Despite a slowdown, prices continue rise due to more high-quality assets trading. During the past year, the median price has risen 6% to $301 per square foot.
The widening expectations gap may slow sales activity, with the majority of cash-heavy buyers targeting stabilized assets in mature locations. Other investors may want to examine core locations such as Anaheim due to its steady tourism industry.
More stringent lending policies and a wider price expectations gap will continue to suppress sales activity in the retail market this year. Currently, single-tenant buildings are trading with capitalization rates in the mid- to high-5% range, while recent deals involving multitenant buildings posted rates in the low- to mid-6% range. Although capitalization rates likely will trend higher as the year progresses, especially in the lower tiers, buyers anticipating major price corrections may miss opportunities.
Indeed, owners that purchased properties earlier in the decade have recorded significant price growth and may elect to retain assets in anticipation of a relatively quick economic rebound. Cash-heavy investors with long-term holding strategies may want to explore properties in Anaheim and Santa Ana, where extensive redevelopment efforts and the area’s dense population could provide upside potential once the housing market stabilizes.
Cesta is the regional manager of the Newport Beach office of Marcus & Millichap Real Estate Investment Services.
