The Orange County retail market’s persistent struggles are lack of space, growing lease rates, and limited development projects. Previous quarters have continued to show gradual improvements in fundamentals, though the region has remained relatively flat since the early years just after the recession.
It remained a prime market for retail, with a strong daytime and residential population, growing tourism, and an affluent work force with low unemployment. The region isn’t in short supply of eager tenants, though it’s restricted on product, and more importantly, product at the right price. That begs the question of whether a slight recession could benefit Orange County by presenting rate relief and opening up a wider selection of space types and sizes.
The third quarter proved the region is resilient. Numerous big-box tenants closed stores, though vacancy increased only slightly.
Average asking lease rates continued to grow, with even higher effective rates in each submarket. The region welcomes a brand-new fully leased food hall, the start of construction on a new retail development, and an estimated record tourist count of 48.5 million as the year draws to a close.
$2.25 PSF
The average asking lease rate increased by 7 cents to $2.25 per square foot, reflecting year-over-year growth of 15 cents. Four of the region’s five major submarkets’ rents increased, the largest quarter-over-quarter change in the Central Coast submarket, up 16 cents per square foot. West Orange County was the only submarket with a negative quarter-over-quarter change, dropping 7 cents to $2.25 per square foot. Effective rents in coastal communities and new construction remained strong.
Retail in Laguna Beach and Corona del Mar had an average effective rent of over $6.50 per square foot, while Newport Beach and Huntington Beach exceeded $5 per square foot. Newer developments, such as Village and La Floresta in Brea and Pacific City in Huntington Beach, pushed rents of $4.50 to $6 per square foot. We project asking rates to climb further next year.
Big Box Closures
Closures of multiple big-box tenants helped push net absorption to negative 123,007 square feet, bringing year-to-date net absorption to negative 129,225 square feet. That’s modest, considering the average size of tenants that closed their doors. The bulk of the negative net absorption was in South Orange County, at negative 177,751 square feet, triggered by a series of minor move-outs. The bulk of trendy tenants were vying for more modest-sized spaces, and many of those larger vacant spaces may take time to fill while landlords choose the best tenants to complement their centers.
Construction began in August on The Village at Tustin Legacy, a 111,993-square-foot development. The property is part of the larger Tustin Legacy project, which will include an education district, tech offices, 860 mixed-use units, residential, and an assisted-living facility. It’s currently 75% preleased, with a grocer anchor, drug store, and additional retail and dining options.
The new development brings the retail construction total to 511,993 square feet. The additional square footage is accredited to the 400,000-square-foot The Source at Beach, where construction and preleasing continues.
Analysis provided by CBRE Research
