Retail Leasing Activity, Absorption Up
SAN DIEGO-Experts in the retail sector are saying that this area is beginning to show signs of stability on the West Coast and in Southern California in particular. Local investors are anxious to purchase quality retail assets, and investors nationwide and globally are attracted to the region’s strong demographic makeup and density, Jereme Snyder, SVP, retail services for Colliers International, tells GlobeSt.com.
As GlobeSt.com previously and exclusively reported, Australian women’s activewear retailer Lorna Jane has expanded its presence in the US with 11 new leases throughout the Southern California region. The tenant has taken prominent retail sites in Santa Monica, Woodland Hills, Glendale, Irvine and Huntington Beach, as well as a warehouse for the support of these sites and online fulfillment in Santa Monica. Is this a harbinger of what’s to come with respect to international retailers?
Looking at San Diego alone, according to recent research by Jones Lang LaSalle, major submarkets with strong demographic and population growth, a lack of new high-quality supply and improving leasing velocity are leading the modestly positive outlook. The county’s retail market is still bottoming out, and forecasts all for only incremental improvement to absorption through 2016, but healthy absorption during the latter part of 2011 helped decrease the vacancy rate by 60 basis points, year over year. However, since much of the desired space is already occupied, for demand to increase appreciably deliveries of new retail space must increase.
“While San Diego’s retail real estate market has shown only small gains to date, the barriers to entry, which include geographic constraints of the county as well as the scarcity and price of land, suggest a positive future,” said Craig Killman, SVP and West Coast retail market lead for JLL Retail, in a prepared statement. “It’s worth noting that core properties, both along the coast and through Mission Valley, remain strong with vacancy rates below the county’s average of 5.1%.”
According to a recent report by the Cushman & Wakefield Urban Property Group, leasing activity is up and retail absorption have held steady in Downtown San Diego as the economy recovers, with the mid-year vacancy rate of 10.6% down from the 11.4% reported at mid-year 2011. Year-to-date positive net absorption is 36,626 square feet as compared to 25,795 square feet at the same time in 2011 and -46,212 square feet in 2010, and retail investment activity was very strong in the first half of 2012.
“As absorption has remained fairly stable over the last three years, real estate investors are capitalizing on competitively priced urban assets and taking advantage of historic low interest rates to increase yields,” said Bill Shrader, founder of the C&W group, in a prepared statement.
Bryan Cunningham, recently appointed VP of retail brokerage in the San Diego area for JLL, tells GlobeSt.com, “It’s very trade-area and asset specific, so it’s hard to generalize, but what we’re seeing is the class-A assets, the regional and strong anchored neighborhood centers are seeing positive absorption, and vacancy and rental rates have stabilized. We’re starting to see positive absorption in the A assets, where there’s a proven track record and tenants are strong.”
Nicholas Coo, senior managing director of Faris Lee Investments, tells GlobeSt.com that overall, sustainability relative to tenant sales will dictate where rents will go. “There has been a leveling out of sorts in the rental market, which has exposed the overheating of several trade regions that should have never achieved shop-space rental rates at or above the $3-per-month mark.”
Across Southern California, Cunningham says that the retail assets suffering the most are the class-B and –C assets, due to the draw of the A assets and the fact that there aren’t enough active retail tenants to absorb all of the space out there.
From an investment perspective, some experts say cap rates are rising as the market rebounds, while others say they are continuing to decline but the pace of decline is greater for properties occupied by A+ national credit tenants with long-term leases. “We are seeing continued demand for quality with pricing for several core retail projects hitting cap rates that exceed 2007 levels,” says Coo. “Financing is available at pricing below pre-recession levels, although much more conservatively underwritten on a loan-to-value and NOI basis. We are now seeing 4% cap rates as a regular occurrence in the high-quality single-tenant arena.”
Snyder says that sales activity is stronger than ever. “We have seen more and more institutional owners, REITs and funds entering into the triple-net market for properties occupied by national credit tenants, due to the security of these investments and the availability of historically low interest rates and high-leverage financing options such as CTL financing.”
On a regional basis, experts agree that Orange and Los Angeles counties remain very tight due to owners holding onto their triple-net investments long term. “We are seeing some of those areas stabilize and some tenants starting to look to Riverside and San Bernardino counties—the Inland Empire,” says Cunningham. “Two years ago, most tenants weren’t looking in those areas.”
For an irreverent look at the ups and downs of the retail industry, check out Counter Culture authored by GlobeSt.com Editor, Ian Ritter.
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