Orange County’s retail market felt its fair share of pain in 2009, although the level of stress seen among local malls and shopping centers last year generally paled in comparison to what was seen in more troubled sectors like hotels and offices.
That could begin to change this year.
Retail vacancy rates in OC have doubled in the past 18 months and now stand at about 8.3%, according to CB Richard Ellis Group Inc. data.
That’s the highest vacancy rate for OC’s retail market since early 2001, according to the brokerage’s data.
There was about 616,000 square feet of negative absorption in OC’s retail market last year, with the bulk of the give-backs in neighborhood and strip centers, according to CB Richard Ellis’ data.
Monthly asking lease rates—which now average about $2.55 per square foot—have fallen to mid-2007 rates, if not lower.
While better-positioned assets in good locations are holding their own, troubled assets are beginning to get more attention from their banks, according to CB Richard Ellis’ Phil Voorhees, senior vice president for the company’s national retail investment group.
In 2009, retail property owners and their lenders “were still getting a handle on the market,” said Voorhees.
“This year, I think you’ll begin to see more execution (on deals) as banks start to sell,” he said.
Voorhees heads up a new group for the brokerage that will be focusing on sales of distressed office and retail buildings on the West Coast that are tied to commercial mortgage backed security bonds.
Deals involving distressed assets could begin to pick up in the next few months, he said.
There’s only been one big bank-driven sale of a major local shopping center during the downturn to date, for the 300,000-square-foot South Coast Home Furnishings Centre, which opened in 2006 just before the housing bubble burst.
Newport Beach-based Burnham Ward Properties bought the vacancy-plagued center—which traded hands for $110 million in 2007—last year for $35 million. The new owner’s in the midst of redesigning and rebranding the property.
Burnham Ward currently is working to revitalize the mall, removing 75,000 square feet of retail space at the back end of the center and turning it into offices, while trying to fill the larger empty spaces with retailers.
The center is now being called the South Coast Collection.
More new centers in the area could be in trouble.
Last month, it was reported that a unit of Citigroup Inc. filed a notice of default against the owners of The Shops at Anaheim GardenWalk mall next to Disneyland.
The default notice is the first step in a potential foreclosure by Citigroup. The owners of the mall reportedly haven’t made a payment on more than $188 million in debt since September.
The 440,000-square-foot Shops at Anaheim GardenWalk opened in summer 2008 and has struggled to retain tenants and get visitors in the down economy. It counts a vacancy rate of about 30%.
Officials for GardenWalk said last month that the developer’s negotiations with lenders would “in no way” affect the center’s operations.
Also on the watch list is Lake Forest’s Orchard at Saddleback, a 278,461-square-foot shopping center on El Toro Road.
In September, Fitch Ratings said it expected a delinquency on the $100 million mortgage tied to Orchard, which was completed in 2006. The 25-acre shopping center, just off of the San Diego (I-5) Freeway, is one of the larger redevelopment projects in Lake Forest of late.
There’s been no confirmation of an actual delinquency occurring since that announcement, when Fitch described the Orchard mortgage as a “loan of concern.”
There’s likely to be more reports of troubled retail assets, particularly for new projects and centers that traded hands near the peak of the market, according to brokers.
“There’s definitely distress in the market, based on the fundamentals alone,” said Jereme Snyder, vice president and retail specialist in the Irvine office of Colliers International.
Not too many distressed projects hit the market in 2009, as lenders opted to work with under-fire landlords, according to Snyder.
There’s “been a very small number of bank sales, but I think it’s starting to happen (more),” he said.
New Developments
“Where it’s really scary, especially, is for new developments,” said Snyder. “They’re getting caught in the middle of it.”
Close to 1 million square feet of retail space opened up in both 2007 and 2008, before falling off to a minimal amount of new space last year.
“Some of these properties shouldn’t have been built. Those developers are getting caught with their pants down,” Snyder said.
With Huntington Beach’s 31-acre Pacific City project on hiatus, there’s no new significant retail development moving ahead here, although another 1.8 million square feet of space is in the planning phase.
Developers are hesitant to construct new space as existing centers are sporting large swaths of empty storefronts and remaining tenants are trying to negotiate lower rents to stay.
Calabasas-based Westrust Inc., developer of the Orchard shopping center, said last year it was working with struggling tenants, who in some cases were said to be requesting cuts of 50% or more in their rents.
The shopping center counted a 94% occupancy rate at the time of its completion in 2006, according to filings with the Securities and Exchange Commission made by an affiliate of JPMorgan Chase & Co., which owns the loan. Since then, several major tenants have moved out.
That appears to have caught the eye of credit monitoring agency Fitch Inc., which said it expected the loan tied to the property to become delinquent and transferred to a special servicer.
The property was appraised at $125.2 million and brought in about $10.2 million in annual revenue at the time of its completion, according to JPMorgan Chase’s data.
While some newer projects have been feeling the pinch of the down market, not all retail projects are facing tough times, brokers note.
Investors still are interested in stable projects in the right location, said Voorhees, whose team closed on more than 30 deals last year, including the $79 million sale of the Crossroads Marketplace in Chino Hills.
Likewise, Snyder said he worked on 22 deals last year, including 10 in OC. The most popular deals being all-cash transactions in the $5 million and under range, he said.
