OC Is Killing the Retail Game

Orange County’s retail market is on fire. The first quarter closed with strong absorption—more than 124,000 square feet—and 1.3% rent growth to an average of $2.33 per square foot, according to the first quarter retail report from CBRE. The market had strong retail activity at the end of 2017 as well, and the momentum has kept through the start of the year. A healthy economy is driving the retail activity in the market, which is so strong that even the shuttering of Toys R Us, is expected to have minimal impact.

“The local economy is robust; housing values are back up to an all-time high; and the stock market continues to post strong gains,” Arthur R. Flores, SVP at CBRE, tells GlobeSt.com. “People feel like the have plenty of disposable income, and that translates into strong retail sales. People are confident in the overall economy, investing capital, and stepping out on the risk spectrum. There have been big-box retailers that have had financial trouble and closed stores, but there was no surprise there. A lot of us knew that those were coming. There are a number of active and healthy retailers that are backfilling those vacant boxes. Some of those retailers include fitness tenants, soft goods tenants, grocery and service tenants, like restaurants and internet-resistant retailers.”

The closure of Toys R Us was announced in the first quarter, but with strong leasing activity and a low vacancy rate at 3.4%, landlords aren’t concerned about backfilling spaces, especially because the size is a good fit for the types of tenants that are driving leasing activity, like fitness tenants and grocery chains. “In the short-term, some landlords may feel pressure from Toys R Us closings, especially if they have any debt coming due in the near future,” says Flores. “For the most part, the writing has been on the wall for Toys R Us for a very long time. They have struggled against online competitors, and they haven’t done a good job of keeping their stores relevant. If there is a silver lining for landlords that own Toys R Us properties, it is that their locations are generally infill, great locations. For that reason, I think backfilling these boxes is going to be pretty simple. The majority of Toys R Us buildings are 30,000 to 40,000 square feet, and that fits for a number of the active tenants that are in the market today, like fitness tenants and grocery tenants. Because the majority of those locations are all solid locations, I think they are going to get backfilled very quickly, especially in Orange County.”

Orange County’s retail activity in the first quarter by far led the Southern California market. The retail absorption was more than double the absorption in Orange County, and San Diego had negative net retail absorption. Flores says that is likely because Orange County is a largely infill market, unlike the more sprawling Los Angeles and San Diego Counties. “There were certain boxes and shopping centers built in the tertiary parts of Los Angeles County that fall into the L.A. County report, and that should have never been built and they will probably stay vacant for a long time,” he explains. “Orange County really doesn’t have tertiary markets; the majority of Orange County is infill.”

The momentum isn’t expected to slow down. Flores believes consumer spending and retail leasing will remain strong through the end of the year. “As long as the stock market holds up and the housing market holds up, I think that people feel good about the economy and pretty good about spending discretionary income in these retail stores,” he explains. “I anticipate that retail is going to be strong and post good numbers throughout the year. Given that, I think that retailers are going to continue to open new stores.”