By Terrison Quinn, Managing Principal, SRS Real Estate Partners
Despite a recent uptick in vacancy from 4.07 percent to 4.5 percent and a softening of rents from $32.99 to $32.55 per square foot, Orange County remains Southern California’s tightest retail market. And retail investors remain bullish for good reasons.
Theaters, gyms and other uses shuttered by the pandemic have reopened to greater-than-expected customer demand. In fact, several health club chains have reported they are back to pre-COVID membership numbers. A multitude of entertainment groups and theaters are also communicating positive messages about demand and expressing an interest in expanding. Theater operators have generally said their limitation is more related to content than demand.
The reopening success is even more obvious in categories like grocery stores and drive-thru restaurants. This is apparent in nearly every Orange County city as parking lots are visibly impacted and cars continue to spill out of fast food drive-thru lanes. Most notably, Amazon Fresh is aggressively opening new stores, while fast feeders like Raising Cane’s, Chick-fil-A and Starbucks can’t seem to open new stores fast enough. Sit-down restaurants have also experienced a resurgence in demand with many national and regional groups setting record same-store sales.
Clearly, Orange County has been the beneficiary of several positive factors, including:
- Fewer local restrictions as we recover from the pandemic.
- A high-earning populace.
- A diversified economic base.
The strength of Orange County’s retail market is also apparent to the investor community. This is especially true when taking into account the historically low cap rates sellers continue to command in the midst of a lack of supply in quality, for-sale retail assets.
If there is a negative factor, it is the difficulty in leasing enclosed malls and the ongoing challenges for inline soft goods retailers. Many agree the pandemic simply accelerated trends that were already in play as customer demands shift and convenience becomes the higher priority. This trend will likely continue as more retailers look for space outside of malls that provide greater customer access, convenience, a better experience or a sense of place.
One outlying cause for some concern is the rising cost of construction and labor, which makes new development even more challenging to underwrite. The good news is rents for well-located assets and/or thoughtful developments seem to justify the added costs. Another reason for retailers and developers to be hopeful is unemployment benefits will soon subside, which should ease some hiring frustrations throughout the county and beyond.
The macro-level good news is Orange County will remain an incredibly desirable place to live with an abundance of higher-earning households and a relatively diverse economic base. Moreover, a continued common sense approach to COVID restrictions will remain an advantage. These advantages will benefit Orange County retail, ensuring a favorable outlook for both retail investors and occupiers.