Recovery, more so than in Southern California generally, is the current theme for the Orange County retail real estate market. Positive net absorption amid minimal new supply has returned to the community and neighborhood center market. Vacancy therein is low and falling and rents have stabilized. While most of the projects are small, a number belonging to this property category are under construction. Backfilling, meanwhile, has been an emerging trend for big-box spaces. Power center vacancy is low and rents in that sector have shown recent increases.
With development perennially constrained, meanwhile, no large projects are underway and none larger than the 350,000-square-foot first phase of an outlet center in San Clemente (see the Submarkets section) has reached the planning phase. Indeed, given the county’s large population base (about 3.1 million residents at last count) its substantial rate of household formation and strong local demographic factors, the development profile for projects recently built, currently underway and in the planning-proposal pipeline is notably low. New residential construction activity in Tustin and Lake Forest and wherever else it may occur, for example (as referenced in the opening section of this report), could provide additional localized demand for retailers and retail real estate product.
Embedded restraints on development have contributed to perennially low vacancy profiles. Indeed, two years of substantial negative net absorption in the community-neighborhood shopping center market along with ongoing moderate supply additions provoked a vacancy rate no higher than the 7.0% touched upon briefly in first quarter 2010. With construction severely curtailed thereafter even as demand made its return, descent has been the trend ever since. By the end of the second quarter of 2012 the rate in this sector had declined to just 5.6%, down 20 basis points for the quarter, down 80 year-over-year and barely half the 10.8% second quarter national community-neighborhood sector vacancy rate. With construction again warming up, the rate is expected to flatten out at slightly above 5.0% for the next couple of years. Vacancy at this level provides a firm foundation for rent growth and, other factors allowing, new development as well.
Vacancy in the local power center market also is low. Reis put the second quarter rate at just 3.7%, same as the quarter before, down 30 basis points year-over-year. The second quarter national power center rate was 6.3%, down 50 points year-to-year.
SUPPLY AND DEMAND
Without great deviation from year-to-year, Orange County produced an annual average community-neighborhood shopping center completion total of about 330,000 square feet over the 10-year span ending with 2009. This modest pace yielded to a sharp cutback thereafter as the recession arrived and absorption turned negative. The following two years saw the completion of only 66,000 square feet, in two projects in 2011. The modest positive turn taken by net absorption in 2010, however, intensified the year after, rising to 300,000 square feet. With that, the stage for the market’s next cycle was set.
Community-neighborhood shopping sector net absorption through the first half of 2012 was 168,000 square feet alongside the mere 26,000 of new supply that came on line in a single neighborhood center during the period, in Costa Mesa in June. While it is hardly earthshaking, a new cycle of construction appears to be getting underway. Thus Reis’ August 20 report on individual construction projects cites five with a combined total of 477,850 square feet underway, two of which, with a combined total of 28,350, will deliver by the end of the year. Current activity in this sector, accordingly, is dominated by a single 355,000-square-foot project in Buena Park. It broke ground in August and will complete in 2014 (see Submarkets). Demand, meanwhile, should remain favorably positive over the remainder of 2012 all told.
The development of large-format projects remains scarce. No power center or regional center developments have completed construction in Orange County since the 417,540-square-foot Woodbury Town Center power center finished in Irvine in 2007. The one before that completed in 2003. No projects in either category were under construction or in the planning pipeline per report date. “The continuation of leasing activity by big-box retailers is a sign that national companies will not hesitate to gain footing in the affluent county,” comments Marcus & Millichap. As described in several items in Submarkets, meanwhile, the backfilling of big-box spaces emptied earlier has been a favorable recent trend.
The only project under construction apart from those referenced above is the 130,000-square-foot retail component of a mixed-use development in Garden Grove. A total of 624,000 square feet of retail space in four additional mixed-use projects were in the planned-proposed pipeline. And a 600,000-square-foot two-phase outlet center is in the pipeline in San Clemente. Still, for all retail types combined Reis reports only 2.5 million square feet of space planned and proposed county-wide.
Although vacancy in the community-neighborhood shopping center sector itself remained favorable during the downturn, rents proved acutely sensitive to the upward movement of the rate—and to the attending negative net absorption. Measured by the year, a three-year period of rent loss commenced in 2008. Growth, but at less than 1.0%, returned in 2011. And the first half of 2012 was essentially flat: at $30.58 psf and $26.78 psf, average asking and effective lease rates for the second quarter were unchanged and up 0.1% since year-end. The small gains projected for the remainder of the year would result in growth rates at less than half those reported for 2011 which, as indicated, were small.
Rents in the power center market have done somewhat better. The average second quarter asking price for non-anchor power center space was $37.41 psf, up 0.6% year-over-year. “Concessions were trimmed mildly over the last year,” states Marcus & Millichap in its second quarter report on Orange County retail.