As the nation officially enters a recession, retailers are seeing the impact of consumers pulling in the reigns of spending as confidence reaches all-time lows. Retail sales declined 1.8% in November from the previous month, according to the U.S. Department of Commerce advanced estimates, and 7.4% below November 2007.
Retailers such as general merchandise stores, which reported a 2.2% increase from October 2007, were down 0.4% from September. Gasoline stations reported sales down by 12.9% from September, only up 0.5% from October 2007.
The spending changes consumers have made to adjust to these uncertain economic times continue to be evident in local retail property markets. The OC retail market saw a 35% increase to an overall vacancy rate that now stands at 6.2%. There was 402,342 square feet of negative absorption recorded last quarter, bringing the year-to-date total 400,711 square feet of negative absorbtion. The average asking lease rates for the county declined for the first quarter since the recession began. At $2.63 per square foot, the average asking rent dropped 16 cents last quarter, remaining competitive in comparison to neighboring Southern California counties.
There were three new centers added to OC’s retail inventory last quarter totaling 265,987 square feet. Because many developers have put plans on hold, new construction in OC has dramatically slowed since 2007.
There are currently 291,000 square feet of retail space in the construction phase; one project broke ground last quarter.
Projects scheduled to begin construction this year have been put on hold until a stable economic environment is seen.
Vacancy Rates
Vacancy rates for OC retail shop space increased in the fourth quarter. The overall vacancy rate now stands at 6.2%, denoting a 35% increase from the third quarter and a 59% rise from 3.9% in the fourth quarter of 2007.
Across the board, OC submarkets saw a rise in vacancy last quarter. North County saw the most significant rise in vacancy to 5.7% from 3.8% in the previous quarter. Both Central and South County submarkets reported about a 40% rise, increasing to 7.2% and 6.1%, respectively. The Central Coast submarket climbed to 7.2%, while West County increased to 5.7%.
Of the center types, specialty centers have the highest vacancy level, rising to 11.2% from 9.7% recorded in the previous quarter, while power centers continue to hold the lowest vacancy rate of 3.3%.
Net Absorption
Decreased demand coupled with store closings resulted in 402,342 square feet of negative absorption. The majority of the negative absorption was recorded in the Central and South County submarkets, which each posted more than 100,000 square feet of negative absorbed space. North County followed close behind with 82,850 square feet of negative absorption, while the Central Coast and West County retail markets saw relatively flat absorption with 9,654 square feet and 228 square feet, respectively.
Average Asking Lease Rates
In the fourth quarter, the average asking lease rate decreased 16 cents to $2.63 per square foot, following an 8 cent increase in the third quarter.
This recent decline places rents at the same level seen 12 months earlier. Central Coast has the widest range of lease rates, from a low of $1.10 per square foot to a high of $6 per square foot for specialty centers, pushing the overall average to $3.74 per square foot.
Construction Activity
Approximately 265,987 square feet of construction was completed in the fourth quarter, bringing the 2008 year-to-date total to 906,978 square feet of new buildings. Contributing to the fourth quarter construction activity was Diamond Jamboree, an 85,000-square-foot center in Irvine. Also completing construction last quarter was Orangethorpe Plaza in Fullerton, which totaled 50,451 square feet, as well as Home Depot Center in Huntington Beach, totaling 130,536 square feet. Construction has slowed considerably as only one new center broke ground last quarter and many others remain on hold.
Analysis by CB Richard Ellis Group Inc.
