The Orange County retail market posted a stable first quarter with the overall vacancy rate dropping an additional 3% to stand at 2.9%.
This decline in vacancy can be attributed to the additional 133,150 square feet of positively absorbed space. Although above its Southern California neighboring counties, OC’s average asking lease rate fell 3 cents in the first quarter to $2.29 per square foot.
Lease rates still are up 1 cent from last year’s rate of $2.28 per square foot.
Coming off of a modest holiday season, retail spending has slowed to the weakest pace within the past six months while personal income grew at its slowest rate. Much of that slowdown was attributed to recent poor weather conditions, which affected retail sales negatively.
Consumer confidence, meanwhile, rose in March to push the consumer confidence index to a near four-year high.
While improved, consumer expectations remain restrained and still suggest a cooling in activity this year.
Nearly 3 million square feet remain under construction and include projects such as Woodbury in Irvine, The Strand in Huntington Beach and The District in Tustin.
Additional projects such as Anaheim GardenWalk in Anaheim and phase two of the Commons in Irvine are some of the 1 million square feet planned for the next four years.
The rising cost of construction may have an impact on these projects. The increase in costs is being offset by higher rental rates, but original development projections may need to be altered.
Vacancy Rates
Sustained strong demand for shop space resulted in an additional drop in the overall vacancy rate to 2.9% in the quarter.
Redevelopment construction in some cities continues to take available retail space off the market while many tenants now are looking toward higher density, mixed-use developments.
Vacancy rates in South and West counties remained unchanged in the first quarter, while the other three retail markets posted an average decline of 7%.
The Central Coast market held the tightest rate of 2.6%, while Central and South counties carried the highest rate of 3%.
Of the center types, specialty centers posted the highest vacancy level, although decreasing to 4.9% this quarter. Community and strip centers recorded the lowest vacancy rates of 2.5% and 1.8%, respectively.
Net Absorption
Absorbing more than 133,000 square feet, OC market activity maintained its positive momentum from 2005.
The absorption experienced in the first quarter was 20% greater than the 111,442 square feet of net absorption occurring in the fourth quarter of 2005.
A small amount of negatively absorbed space was seen in West County, while the other markets posted positive activity.
The majority of the absorbed space took place in South County with 99,394 square feet,75% of the total market’s net absorption.
Specialty center activity generated the greatest amount of absorption of the center types, with 104,000 square feet of positive net absorption.
Lease Rates
Despite the large amount of activity, average rental rates declined in the first quarter to $2.29 per square foot.
Although the current lease rate is a 3-cent decrease from the fourth quarter’s rate of $2.32 per square foot, it represents an increase of 1 cent from a year ago.
Asking rents range from a low $1 per square foot in West County to a high of $5 per square foot in South County’s neighborhood centers.
Specialty centers remain the hottest property type in the market. They have generated considerable foot traffic in the past few quarters, giving landlords of these destination properties the flexibility to raise lease prices, which hover at slightly less than $3 per square foot.
Construction
The 279,000-square-foot Orchard at Saddleback in Lake Forest completed construction during the first quarter.
More than 2.8 million square feet are in the construction phase and set to be completed later this year or early 2007.
Some of this construction includes phase four of the Irvine Spectrum, which will add 136,074 square feet with a Target.
Data and analysis provided by CB Richard Ellis Group Inc.
