Retail Solid But Awaits Recovery

ORANGE COUNTY, CA-Retail properties will perform solidly in Orange County in 2003, with shopping centers expected to remain popular with investors as the market absorbs new space despite the sluggish economy, according to a new study.

The report by Marcus & Millichap says retail centers in the county “have performed relatively well during the recent period of economic weakness,” and it anticipates that the average vacancy rate in retail properties will stand at 4.8% at the end of 2002, up from 4.2% at the end of 2001. The county is expected to finish the year with net absorption of space, but the higher vacancy rate will reflect the 3.5 million sf of new space completed during the year. Investors are aggressively pursuing retail properties, the report notes, with underperforming strip centers being the big seller in 2002.

The report says the tightest market is central Orange County, the most densely populated part of the county, where retail centers are expected to post a vacancy rate of just 3.3% at the end of 2002. Nonetheless, rents in the central county area are expected to rise only 2.5% over 2001 and end 2002 at $1.78 per sf, triple net. The highest rent growth is in the southern parts of the county, where rates will have risen by 3.9% to $2.34 per square foot by the end of the year. Overall, the county is on track to post a gain in rents of 2.3% to end 2002 at $1.99 per sf.

Although the local economy has yet to recover significantly, the Marcus & Millchap report notes that job growth has remained positive and is expected to improve in 2003. The company expects that retailers will absorb most of the new space hitting the market in 2003 and that average vacancy rates will rise only slightly, as will rents. Among the factors driving the solid performance of retail properties is the stability of retail sales in the county, which are expected to finish 2002 with a gain of $1 billion or 2.3% over 2001. The improving economy in 2003 is expected to provide a further boost to retail sales, with an increase of 5.4% in total retail sales forecast for the year.