The Orange County region concluded the third quarter with overall favorable market fundamentals and strong retail demand, despite big-box changes and uncertainty in the retail climate.
Vacancy decreased further to 3.6%, the lowest reached this year. Multiple junior and big-box deals, coupled with an active leasing quarter, resulted in over 175,800 square feet of positive net absorption.
OC’s overall asking lease rate remained unchanged at $2.32 per square foot. The county’s retail asking lease rates rose over the past three years, with coastal and new construction driving rents across the region. The rate reflected a year-over-year increase of 3.1%, or 7 cents per square foot, and remained the highest rent in five years. Regionally, effective rates remained strong, the most notable lease signed along the coast above $5.50 per square foot. Effective rates ranked next highest, with multiple deals completed above $4.50 per square foot, followed by effective rents in North and West County, at above $4 per square foot. The most active tenant types signing leases were banks, restaurants, and service and fitness tenants.
The county’s effective rent reached the highest level to date. Submarkets with the largest quarter-over-quarter changes were West OC, with an increase of 27 cents to $2.58 per square foot, and Central Coast with an increase of 8 cents to $2.94 per square foot. The largest overall decrease was in North OC with a 7-cent drop to $2.19 per square foot resulting from leased high-rent spaces. Both South and Central OC rates dropped 1 cent per square foot.
Vacancy decreased in the county from 3.9% to 3.6%, reflecting a 10% year-over-year drop and further displaying OC’s capacity to foster and support retail tenants. Although 3.6% remains one of the lowest rates in the region since the recession, it may be challenging to sustain as big-box tenants become scarce and rents continue to rise.
Big-box vacancy levels remained stable with a minimal increase of 0.1% in the first half of the year. A growing trend among big-box landlords was splitting up large space to attract more active users in the mid- and small-box categories, reducing the number of boxes in the market. The trend helped lower box vacancy, but occupancy gains decreased in the first half of the year. The most active tenants requiring over 20,000 square feet are fitness users and nontraditional, high-end groceries. Remaining vacant boxes largely consist of former department stores, sporting goods and office supply. Rents in the big-box category dropped as rents in the shop category increased with tenants active in class A and class B categories. Class B space makes up almost two-thirds of OC’s vacant box inventory and the Central Coast submarket continued to be the strongest in activity.
Absorption maintained momentum with a handful of big-box deals and numerous midsize and small-box leases signed. The quarter ended with 175,800 square feet of net space absorbed, bringing the year-to-date total to 211,739 square feet. The most notable deals completed were a 67,000-square-foot Hobby Lobby in Cypress, a 29,181-square-foot Urban Home in Irvine, and a 24,045-square-foot Planet Fitness in Foothill Ranch. North OC carried the region’s positive absorption with 179,946 square feet from deals in Buena Park and Anaheim.
Analysis provided by CBRE Research
