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OC’s Retail Sector Transforms, Consolidates

Growing attention from retailers looking to expand in Orange County, coupled with a looming consolidation and redevelopment of retail real estate, in particular large shopping centers, has sent the sector’s vacancy rate to near historic lows.

The local retail vacancy rate fell to 4% over the summer, according to data from Costar Group. Area brokers note that the vacancy rate is the lowest it’s been since 2007.

OC’s base of retail space currently totals about 144 million square feet, with monthly asking rents averaging $2.65 per square foot, according to CoStar.

About 4 million square feet of retail space in OC was demolished over the past year, according to industry data.

The dwindling supply of retail space is causing somewhat of a real estate chase, with prospective OC companies running out of expansion options as higher-end shopping centers hang on to a full tenant roster, and new development opportunities shrink.

There’s just one significant retail project under development in Orange County: the River Street Marketplace, a 60,000-square-foot center under construction in San Juan Capistrano, with 22 pre-leased tenants.

‘Multiple Offers’

Increasing consumer demand for suburban markets like Orange County has sent tenants scrambling to plant their flag here.

“Tenants are hanging in and landlords are raising rents,” JLL’s Orange County Vice President Justin McMahon told the Business Journal. “The very best space is going to have multiple offers on it every time.”

This new dynamic brings about a shift to a market that was once referred to as “over-retailed,” brokers note, which prompted owners of traditional shopping centers to rethink uses, often replacing retail with housing.

That trend has continued, with the owners of several large shopping centers pivoting toward housing and mixed use projects.

Last month, the Segerstrom family disclosed plans to replace a roughly 100,000- square-foot collection of stores at the South Coast Plaza Village, located across the street from South Coast Plaza, with a mixed-use project that includes nearly 1,600 residential units.

The proposed project, called the Village at Santa Ana, echoes a similar plan that Related California has in store for the adjacent Metro Town Square Mall, which now counts about 460,000 square feet of retail space.

On the Move

Tenants actively looking to expand within or enter OC vary, according to brokers, with sectors ranging from grocery stores to discount retailers to restaurant and entertainment concepts.

Many Los Angeles and San Diego-based restaurant concepts are traveling to OC to help further their footprints, seeing the region as a gateway to growth.

Quick-service restaurants have been aggressively driving demand for small store spaces under 5,000 square feet, according to JLL.

JLL client Bushfire Kitchen recently completed a deal for its first location in OC, while a pair of eateries with large presences in LA—Sweetgreen and Shake Shack—recently debuted their first OC outposts at the Irvine Spectrum Center.

Sweetgreen, a fast-casual chain, has since doubled its local presence, with a spot at Tustin’s Village at Tustin Legacy.

Brands from LA are looking up and down Pacific Coast Highway for potential vacancies, according to SRS Real Estate Partners, leaning to more coastal locations in Newport Beach and neighborhood centers in Costa Mesa.

Newport Beach has added several high-end restaurant clients in recent months, with brokers pointing to standouts like the Joey restaurant at Fashion Island, the region’s second- largest shopping center ranked by sales.

“These companies are not ignoring Orange County anymore,” Terrison Quinn, managing principal at SRS, said.

Grocers

On the larger scale, grocery stores continue to outperform at retail centers following the pandemic, with notable local expansions from Sprouts, Amazon Fresh and H Mart.

There’s high investor and developer demand for grocery-anchored outlets, Quinn said.
San Juan Capistrano-based Almquist, which is behind the River Street Marketplace shopping center in its hometown, is working on plans for a grocery-anchored retail center for Great Park Neighborhoods, the first of its kind for the Five Point Holdings LLC community in Irvine.

The proposed merger of Kroger and Safeway will lead to consolidation and change the landscape, according to brokers, with well-performing grocers likely to tap into potential vacancies for expansion opportunities.

Changing demographics has led to more demand for specialty grocers serving Asian and Hispanic communities, SRS notes.

A new Northgate Market in Costa Mesa is taking over the former Albertsons; Filipino supermarket chain Island Pacific opened its first OC location in Lake Forest last October; and Buena Park-based Asian grocer 99 Ranch Market has two upcoming locations in Tustin and Aliso Viejo.

Grocery-anchored retail was the most heavily transacted multi-tenant retail type in the first half of this year, with national transaction volume topping $3.6 billion, according to JLL.

Buyer Demand

Consumer spending is driving much of this tenant and investment interest within Orange County.

The region’s largest shopping centers reported a 28% increase in taxable sales to a combined $9.7 billion for the 12 months ended June 2022, according to Business Journal data.

Orange County’s high-income consumer base and strong worker population has added to tenant interest, according to brokers.

Retailers appear to be “chasing that upscale consumer,” JLL’s McMahon said.

Brokers have also pointed to OC’s approach to the pandemic recovery as a show of the county’s support of the business community, providing a beacon for incoming brands from other areas.

“As long as the consumer is healthy and continues spending aggressively, retail is going to continue to be strong,” Quinn of SRS said.

Mall Redevelopments

Redevelopment of OC’s shopping centers has the potential to provide new, boutique spaces for tenants while also shrinking retail availability in the county, sending vacancy rates lower.

Traditional malls that continue to struggle from lower foot traffic are looking to repurpose under-utlized retail space into other uses, from dining halls to apartments.

“There might have been too much retail,” Quinn said of certain centers.

Santa Ana’s MainPlace Mall has a $500 million redevelopment plan in place which will decrease its overall retail footprint. It aims to deliver 309 rental units this year, and many more in future phases.

Brea Mall is looking to replace some retail with nearly 400 housing units while adding 150,000 square feet of new retail space; the mall’s former Sears store will hold much of that new product.

In Westminster, Shopoff Realty Investments is looking to redevelop the city’s namesake mall into a mixed-use campus with plans to add housing, medical offices, and more contemporary retail concepts.

Irvine Co. has begun demolition work for a project that will add 1,261 residential units located on a part of the Irvine portion of the 79-acre Market Place center.

“I think it’s natural for the rest of these malls to start thinking about how to reposition and shrink the enclosed retail and convert these projects, which often sit on very good land,” Quinn said.

Other notable mall redevelopments underway is the overhaul of the former Laguna Hills Mall, which has been demolished to make way for new uses. Merlone Geier is behind that long-awaited rebuild, with new approvals to develop retail, a hotel, 1,500 apartments and possibly offices under the Village at Laguna Hills name.

Merlone Geier is also looking to invest $650 million in an overhaul of Buena Park’s largest mall, the Village at Buena Park, with plans to 1,302 homes to the 1.1 million-square-foot shopping center.

These projects will “show how well multifamily works with retail,” McMahon said.

Pickleball, Fitness Focus

Fitness and entertainment tenants are among the top growers within Orange County’s retail scene, with pickleball checking both of those boxes.

Companies like Ace Pickleball and Irvine-based Courtside Superstore are looking to add facilities in Costa Mesa and Huntington Beach, respectively.

Terrison Quinn, managing principal at SRS Real Estate Partners, said he gets at least one call a week from pickleball companies looking to open 25,000 to 40,000-square-foot clubs.

Discount value gym models, including EOS Fitness and Crunch, have also done many area deals as of late.

The latter is opening a new location in Brea; EOS expects two additional in Fullerton and San Clemente by the end of the year.

On the higher end, LA Fitness’ new Club Studio brand has been actively making deals in OC with two locations open.

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