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NEWPORT BEACH, CA-Retail vacancy is expected to push higher but remain tight in Orange County this year, one of the effects of the ongoing recession. Meanwhile, a design expert sees changes in how developers approach retail in large part because of the effects of the downturn.

After rising by 1.6% last year, vacancy will push up 1.4% this year to reach 5.7% by the end of 2009, according to a Marcus & Millichap retail report and forecast for Orange County, which notes that even with these vacancy increases the county’s retail market will likely remain among the tightest in the country. Joseph Cesta, regional manager of the Newport Beach office of Marcus & Millichap, comments that the county’s “wealth and lack of developable land will help to maintain investor interest in local retail properties this year,” although transaction velocity will vary by asset class because buyers are expected to remain cautious when evaluating multi-tenant properties.

The forecast expects that strip centers in blue-collar neighborhoods within the North and Central submarkets will likely have longer marketing times this year, given buyers’ concerns regarding tenant retention. Cap rates for multi-tenant properties currently average in the high 6% to mid 7% range and are projected to climb in 2009 as fundamentals weaken. Investor interest in single-tenant properties is expected to remain healthy, according to the Marcus & Millichap report and forecast, which shows that single-tenant cap rates averaged in the low- to mid-6% range at the end of 2008 and have already begun to edge higher so far this year.

The Marcus & Millichap outlook forecasts that concessions are likely to rise this year as owners focus on tenant retention. It projects asking rents to drop 2.9% to $30.64 per square foot per year, while effective rents are projected to slip 3.8% to $27.25 per square foot per year. Another report on the county’s retail space, by CB Richard Ellis, notes that the average asking lease rates for the county declined for the first quarter since the recession began. CBRE pegs the year-end rate at $31.56 per square foot per year, down 16 cents in the fourth quarter.

With Orange County employers forecast to trim payrolls by 1.7% percent in 2009, shedding 25,000 workers after cutting 41,000 jobs last year, Marcus & Millichap forecasts that approximately 660,000 square feet of new retail space will be delivered this year, down from 843,000 square feet in 2008. CBRE’s report notes that many developers have put plans on hold while they wait for the economy to improve.

Developers who are building, and those who resume when the economy improves, might well take some different approaches than they did in the boom years before the recession, according to Greg Lyon, a design principal with Nadel Architects. Lyon, who oversees and collaborates with Nadel’s managing principals in six offices throughout California, Nevada and Arizona, tells GlobeSt.com that shopping center development “is not only shifting back to the basics but also being significantly scaled back in size including less shop space.”

Developers who formerly built 100-acre projects are only interested in ground-up projects of up to 50 acres, Lyon says, while those who might have developed projects of 50 to 60 acres in the past are now looking at 10 to 20 acres. “I also think there will be an increased focus on ground-up development that is anchored by value-oriented retailers and/or outlet stores,” Lyon says. With businesses and consumers cutting back on spending across the board, the term “lifestyle” shopping center in the future “just might well be those centers that answer the basic, daily needs of the consumer–the traditional supermarket/drug-anchored shopping center,” he adds.

Despite the general slowing of retail construction in Orange County, CBRE notes that three new centers have been completed recently: the 85,000-square-foot Diamond Jamboree center in Irvine, the 50,451-square-foot Orangethorpe Plaza in Fullerton and a 130,536-square-foot Home Depot Center in Huntington Beach. Lyon says that even with the downturn, “Those retailers and shopping centers that can provide shoppers with their daily, basic needs will thrive in 2009 and beyond.”

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