Despite Economic Headwinds, Orange County Retail Market Fundamentals Remain Strong

Anchored in the shadows by Stater Bros., the Baker Fairview Center in Costa Mesa sold for $21.2 million, representing a cap rate of 5.26%.

By John R. Read, Senior Vice President, CBRE National Retail Partners-West

Getting back to basics is essential in these times of growing uncertainty. It is not new news that we are currently seeing inflation at its highest level in 40 years, significantly higher interest rates and lower economic growth expectations, including renewed talk of an impending recession, fueling uncertainty in the US market. These factors force us to consider the fundamentals of a market. For attractive fundamentals, look no further than the Orange County retail market.

Orange County’s unemployment rate was 2.7% in April 2022, down from a revised 3.1% in March 2022, and lower than the estimate of 6.8% a year ago. With California’s unadjusted unemployment rate at 3.8% and the nation’s at 3.3% (for the same period), Orange County outperformed both indicators.

The county’s leisure and hospitality sector added 6,200 jobs, 74% of which between March and April 2022, the most jobs of any sector. Food services and drinking places accounted for most of the employment increase in the subsector, with 4,000 more jobs. Arts, entertainment and recreation also added 1,600 jobs. Orange County has approximately 1,246 arts, entertainment, and recreation destinations, as well as 7,993 lodging and dining destinations, making these sectors a vital part of its economy. Many of these services have a direct or incidental relationship with a variety of retail businesses, which further reinforces the strength of the Orange County retail market. In fact, the retail sector employs one in 10 Orange County residents.

Despite the short- and long-term impacts on retail, such as the recent economic effects of the pandemic and continued competition from e-commerce, the demand for retail in Orange County remains stable. The average asking rental rate in Orange County at the end of the first quarter increased 3.9% year over year to $2.93 per square foot per month. That was 12.7% above the pre-pandemic demand rate in the first quarter of 2020.

At 4.7%, the vacancy rate fell 10 basis points year over year and remained unchanged quarter over quarter. Net absorption was negative 30,583 square feet in the first quarter due to a few store closures. However, stronger rental activity is expected due to a flurry of recent transactions, as well as continued strong demand from retailers looking to capitalize on Orange County fundamentals. Recent leases include Amazon Fresh in Laguna Hills, H Mart in Westminster, Island Pacific Supermarket in Lake Forest, Sprouts Farmers Market in Garden Grove, Target in Costa Mesa and Huntington Beach, At Home in Costa Mesa, Bass Pro Shops in Irvine and 99 Ranch in Aliso Viejo and Tustin.

New construction activity for large-scale commercial developments remains limited. Some refits indicate the highest and best use, which may not involve retail. With increasing tenant demand in an already supply-constrained market, these trends should benefit the existing commercial real estate stock.

Our National Retail Partners-West team was fortunate to participate in some of this sales activity, selling 17 commercial properties in Orange County in 2021 and 2022. These included anchored and unanchored malls, in addition to net assets leased to sole tenant. Examples include Katella Gateway in Garden Grove for $33.5 million at a cap rate of 5.82% and Baker Fairview Center in Costa Mesa for $21.2 million at a cap rate of 5.26%. On the sole tenant side, sales include Home Depot in Anaheim Hills for $53 million at a cap rate of 4.58% and Starbucks in Fullerton for over $3.8 million at a cap rate of 3. 45%. Our most recent unanchored mall sale in June of this year was Foothill Plaza at Foothill Ranch for $10.3 million at a cap rate of 5.04%.

Orange County has always been a target market for active retail investors and tenants. This likely increased as a result of the pandemic due to the county’s fewer restrictions compared to neighboring Los Angeles County.

Nobody has the crystal ball of inflation, interest rates and the economy in the short and long term. However, if you want to pick a market that will continue to be resilient and driven by its underlying fundamentals, Orange County should be high on your list.

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