Reasons for OC's Low Retail Vacancy

NEWPORT BEACH, CA—Local and national economic recovery, combined with restrained retail construction, has allowed for increased absorption in the Orange County market, which has lowered the retail vacancy rate, CBRE senior research analyst Rob Crumly tells GlobeSt.com. According to a Q4 report from the firm, Orange County retail achieved its lowest vacancy since the Great Recession during the fourth quarter of 2016, and its vacancy rate is projected to decrease gradually over the next 12 months, with average asking lease rates forecasted to increase to $2.39 per square foot by Q4 2017.

We spoke with Crumly about the low vacancy rate and where he sees it heading.

GlobeSt.com: What do you credit for Orange County's retail vacancy reaching pre-recession level?

Crumly: The economy has recovered both locally and nationally over the past decade. We have seen an increase in housing values, a decrease in unemployment and substantial gains in the stock market. As the financial markets improved, retailers ramped up their expansion. Cautious due to the recent pain of the recession, they made a conscious effort to focus on A and B markets first. Orange County, being situated where it is, has always been considered a strong market. Landlords and developers, also cautious, chose to hold off on retail construction only until very recently. With little to no new space available, retailers focused on absorbing the best space currently available, thus lowering the overall vacancy rate.

GlobeSt.com: How much of the vacancy drop is due to properties' change of use?

Crumly: The short answer: Not much. In my experience and research over this timeframe, retail properties in Orange County, even during the grips of the recession, have had a challenging time changing their use, for a variety of reasons. Like I stated above, landlords and developers have been very averse to taking any risks, and converting uses tends to be risky. Also, local governments are not typically in favor of major use changes to property unless it is seriously distressed or blighted. Because there is relatively less distressed and blighted property in Orange County compared with other regions, there has been little seriously pressured to do so. Having said that, we have seen some conversions, specifically to multifamily, office and religious uses, but it only makes up a small portion of the activity in the market.

GlobeSt.com: Where do you see the vacancy level in this market heading?

Crumly: In the short term, I actually see it increasing slightly, due to the closure of large-format retailers on a national level. While the reasons for closures are not necessarily a symptom of the local market, they tend to negatively affect former co-tenants, which had depended on the foot traffic these larger retailers provided. Some co-tenants in these centers will likely be forced to close or relocate if the larger spaces remain vacant. It is very important that landlords, tenants and the retail brokerage community act quickly to refill these spaces or vacancy will increase. Most of these sites, though, are very desirable, and I predict new tenants will jump at the opportunity to gobble them up. Having said all this, Orange County is not completely immune to national economic trends, and we will have to see where the next few years take us.

GlobeSt.com: At what point does it make sense to develop more retail in this market?

Crumly: We actually already are; 2016 saw the largest increase in retail construction in Orange County since before the recession, with more than 1 million square feet of new retail. New centers include Pacific City in Huntington Beach, the Outlets at San Clemente and the Village at La Floresta in Brea.  The current pace and geographic focus of retail development in Orange County has been very deliberate and thought out, and if landlords and developers use 2016 as a model, we will continue to see a healthy and robust retail market in the region going forward, barring any unforeseen national trends.

NEWPORT BEACH, CA—Local and national economic recovery, combined with restrained retail construction, has allowed for increased absorption in the Orange County market, which has lowered the retail vacancy rate, CBRE senior research analyst Rob Crumly tells GlobeSt.com. According to a Q4 report from the firm, Orange County retail achieved its lowest vacancy since the Great Recession during the fourth quarter of 2016, and its vacancy rate is projected to decrease gradually over the next 12 months, with average asking lease rates forecasted to increase to $2.39 per square foot by Q4 2017.

We spoke with Crumly about the low vacancy rate and where he sees it heading.

GlobeSt.com: What do you credit for Orange County's retail vacancy reaching pre-recession level?

Crumly: The economy has recovered both locally and nationally over the past decade. We have seen an increase in housing values, a decrease in unemployment and substantial gains in the stock market. As the financial markets improved, retailers ramped up their expansion. Cautious due to the recent pain of the recession, they made a conscious effort to focus on A and B markets first. Orange County, being situated where it is, has always been considered a strong market. Landlords and developers, also cautious, chose to hold off on retail construction only until very recently. With little to no new space available, retailers focused on absorbing the best space currently available, thus lowering the overall vacancy rate.

GlobeSt.com: How much of the vacancy drop is due to properties' change of use?

Crumly: The short answer: Not much. In my experience and research over this timeframe, retail properties in Orange County, even during the grips of the recession, have had a challenging time changing their use, for a variety of reasons. Like I stated above, landlords and developers have been very averse to taking any risks, and converting uses tends to be risky. Also, local governments are not typically in favor of major use changes to property unless it is seriously distressed or blighted. Because there is relatively less distressed and blighted property in Orange County compared with other regions, there has been little seriously pressured to do so. Having said that, we have seen some conversions, specifically to multifamily, office and religious uses, but it only makes up a small portion of the activity in the market.

GlobeSt.com: Where do you see the vacancy level in this market heading?

Crumly: In the short term, I actually see it increasing slightly, due to the closure of large-format retailers on a national level. While the reasons for closures are not necessarily a symptom of the local market, they tend to negatively affect former co-tenants, which had depended on the foot traffic these larger retailers provided. Some co-tenants in these centers will likely be forced to close or relocate if the larger spaces remain vacant. It is very important that landlords, tenants and the retail brokerage community act quickly to refill these spaces or vacancy will increase. Most of these sites, though, are very desirable, and I predict new tenants will jump at the opportunity to gobble them up. Having said all this, Orange County is not completely immune to national economic trends, and we will have to see where the next few years take us.

GlobeSt.com: At what point does it make sense to develop more retail in this market?

Crumly: We actually already are; 2016 saw the largest increase in retail construction in Orange County since before the recession, with more than 1 million square feet of new retail. New centers include Pacific City in Huntington Beach, the Outlets at San Clemente and the Village at La Floresta in Brea.  The current pace and geographic focus of retail development in Orange County has been very deliberate and thought out, and if landlords and developers use 2016 as a model, we will continue to see a healthy and robust retail market in the region going forward, barring any unforeseen national trends.