Necessity Chains Spur OC Retail Demand

ORANGE COUNTY, CA—According to local industry sources, Orange County is on the up and up. Class A retail product in high-traffic locations—urban and strong suburban markets—saw strong demand in 2011, and will continue to lead the market in 2012.

In addition, this year's rise in demand will be driven by necessity chains and grocers that are reconfiguring dark big-box and community center space, a trend that took shape shortly after the recession and will offset the need for new supply in 2012, explains Joseph Cesta, regional manager of the Newport Beach, CA office of Marcus & Millichap. He cites Sprouts Farmers Market as an example of a chain that is transforming a former Borders in Yorba Linda, adding to a string of retailers such as Whole Foods and Total Wine & More that will absorb sites elsewhere.

The good news in Orange County is that most major retailers are looking at expansion strategies, Jeff Moore, senior managing director of retail in Southern California for CBRE, tells Real Estate Forum. "The big-box sector is very active today," he says. "There's a lot of activity absorbing the vacancies and there is good competition for the best spaces."

Like Cesta, Moore says that the grocery category has been very aggressive. "Sprouts, Whole Foods, Smart & Final and the ethnic grocers all have a niche focus, whether it's price, organic foods, etc., and traditional grocers have to figure out how to compete," he says. "The big story is what will happen when Walmart enters the market with its grocery concept, which will be highly price driven."

According to Keith Kropfl, an SVP in the Irvine, CA office of Voit Real Estate Services, "Orange County is more resilient than many other markets, and there are fewer opportunities for class A retail space." He explains that as retailers compete for Orange County space and take advantage of lower lease rates that are still available, retail vacancy will remain low.

In terms of capital, Phil Voorhees, SVP of CBRE, tells Forum that there is a lot of it looking for that quality, highperforming, grocery-anchored neighborhood shopping center-type assets. "In the past six months, we saw the best pricing since 2007—in some cases exceeding 2007 pricing—for the best projects in Southern California, and there will be more to follow," he says. "But it's important to differentiate that this is for the perfection' center in the eyes of the investor—the best properties, with highcredit tenancy, a great location, no financing in place, strong tenant sales, and a conventional site plan. Pricing and demand drops off dramatically for centers that don't fall into this tightly defined category."