Value-Add Retail Demand to Supply Is 15 to 1

The demand for value-add retail investment in Orange County far exceeds the opportunities. In fact, there are as many as 15 active investors chasing every value-add retail deal. Merlone Geier Partners recently acquired the College Plaza Shopping Center—a deal described as a true value-add opportunity—for $30 million. This was a rare opportunity, largely because Orange County’s retail market has remained active and healthy this cycle.

“There is a tremendous amount of capital chasing value-add opportunities, and that capital has had a very challenging time finding enough deals to buy,” Geoff Tranchina, a broker at JLL that represented the seller in the deal. “For every opportunity like College Plaza, there are 10 to 15 active investors looking for these assets. There is no shortage of capital, but there is definitely a shortage of opportunities.”

This particular property was 73% occupied, and one of the anchor tenants, The Good Will, vacated an anchor space during the sale. The second anchor tenant, 99 Cent Store, has a lease due to expire. “The property had two anchor spaces with expiring leases, so you have a large block of space that could be repositioned or reimagined,” says Tranchina about why the property offered so much upside. “In addition, there hadn’t been a major investment to update the façade or to beatify the assets. It was an asset that had a quality location and as a result, there were a number of ways that investors could look at redeveloping or repositioning the asset. It is across from California State University, Fullerton, which is a major educational institution, and it is at a high-traffic intersection with properties around it that have recently been developed.”

The location is a key characteristic here. Well-located assets are in the highest demand, the hardest to find on the market, and, of course, are garnering the highest prices tag. The dearth of opportunities is largely because the Orange County retail market has remained healthy, despite the ecommerce phenomenon. “High-quality locations like this continue to sell at a premium throughout Southern California,” says Tranchina. “Given that we have had a pretty long economic recovery here, from the depths of the financial crisis, and there have been a lot of assets that have been redeveloped in the last 10 years. As a result, there are fewer true redevelopment opportunities in areas like Fullerton.”

In general, investors are looking for two types of opportunities: high-end retail or value-add deals. Both are hard to find. “We are seeing that investors are bifurcated. They are either looking for ultra core assets that are great pieces or real estate with potentially limited opportunities to create any long-term value, or they are looking for ways to add value because they raise capital around that strategy,” explains Tranchina.

This investor demand isn’t going anywhere, not with the strong leasing activity and tenant demand. This market dynamic, however, lives in contrast to the narrative depicting a weak retail market. “There are broad descriptions about the challenges that retail is having, and those challenges don’t apply across the board in the higher quality coastal growth markets throughout the country,” says Tranchina. “In those markets, retail occupancy remains at all-time highs, retail rents continue to grow and retail demand continues to grow. Yes, there are tenants that have a national presence that aren’t doing well, like Toys R Us. However, I can tell you from my experience that there are retailers that cannot wait to get into some of those boxes.”