Orange County’s retail market has been acting a little schizophrenic this year when it comes to property sales.
For smaller stores and retail centers in the county’s more desirable areas, there are signs that buyers are willing to pay prices not too far off the peak levels seen a few years ago.
A vacant Corona del Mar store sold for almost $800 per square foot recently.
For larger malls, it’s another story.
At least two large shopping centers struggling to find tenants have gone back to lenders in the past year. One—Mission Viejo’s Kaleidoscope Retail Center—recently sold for $22 million, a little more than a third of its reported $60 million construction cost.
It’s not just OC malls that are trading at steep discounts.
A Newport Beach investment group known as Chino Hills Mall LLC paid $94.5 million for the Shoppes at Chino Hills, a 388,000-square-foot mall that was built in 2008. The sales price was well below the mall’s construction cost of $135 million.
“People still are afraid of buying, unless the thing they’re buying is perceived as a safe deal,” said Paul Bitonti, a vice president of investments for the Newport Beach office of Marcus & Millichap Real Estate Investment Services.
Bitonti recently worked on one of the more eye-opening coastal OC deals in recent months, a $2.1 million sale of an empty store in Corona del Mar. The 2,592-square-foot store on East Coast Highway, formerly the site of a rug dealer, traded hands for about $791 per square foot.
A jeweler bought the site to open its own store.
That’s a new high for properties selling on OC’s coast of late, according to the brokerage. But it’s not necessarily a sign of things to come, Bitonti said. Even in Corona del Mar, vacancy rates for stores are at their highest level in years, scaring off some investors, he said.
Vacancies
On a whole, OC’s retail sector now counts a vacancy rate of 8.7%, the highest level seen in more than a decade, according to data from the local offices of CB Richard Ellis Group Inc.
“I think we’re going to see more of what we saw last year. There’s still a lot of money waiting on the sidelines,” Bitonti said.
Rising vacancies and rental rates that have fallen 20% or more the past few years are keeping wary investors from making more deals in the middle of the market, according to CB Richard Ellis’ Phil Voorhees, senior vice president for the company’s national retail investment group.
“There’s still a huge demand for core properties in the best places, as well as for distressed deals like Kaleidoscope (Retail Center). The middle part of the multitenant market is where it’s a little slower,” said Voorhees, who is part of a team working on sales and acquisitions of distressed shopping centers on the West Coast.
The best retail properties to sell in OC right now are grocery-anchored shopping centers in good locations, according to Rich Walter, president of Irvine-based brokerage Faris Lee Investments.
Those properties can still command capitalization rates—expected operating income divided by the cost of the building—at less than 7%, he said.
For buyers of those grocery-anchored stores, there also are still “fantastic” financing options available for loans in the 60% to 65% range, according to Voorhees, which should boost deal making in the near-term.
Among recent deals, Walter’s company this month closed on a $4 million sale of a 7,324-square-foot multitenant retail property in Tustin.
The center closed at a 6.3% percent cap rate and sold for $552 per square foot. That’s believed to be the highest price per square foot paid for a multitenant retail property in OC during the first half of 2010.
“The question is, ‘Is this a trend, or just a window?’” in an otherwise tough stretch for the industry, Walter said.
Receiver Sale
Faris Lee also is handling one of its first sales in OC being overseen by a court-appointed receiver, the Capistrano Collection center in San Juan Capistrano.
The 25,561-square-foot retail and office center, just off the San Diego (5) Freeway on Ortega Highway, sold for $10.2 million in 2007. The property traded hands at a 5.4% cap rate—a record low at the time for OC buildings of that type costing more than $10 million.
After the prior owner defaulted on their loan, the property’s back on the market in a receivership-driven sale. Walter said his firm’s gotten more than 25 offers on the property, largely from private sources of capital, but isn’t expecting the final sales price to exceed $10 million this time around.
“You’re going to see more distressed sales (in OC). The activity level is increasing, but it’s a process to get through them,” Walter said.
