Lack of Quality Retail Space Fumbles 2Q Leasing

Orange County’s retail market—which is undeniably healthy—fumbled in the second quarter. The vacancy rate quarter-over-quarter bumped up 10 basis points to 3.5% with negative net absorption of 59,165 square feet, according to the latest quarterly report from CBRE. While the second quarter saw wavering leasing activity, the Orange County market continued to show year-over-year growth with the vacancy rate down 50 basis points and lease rates up 4.3% to $2.42 triple net per square foot. The blip in the second quarter was likely caused by a dearth of quality space—after all, the vacancy rate is still a low 3.5%.

“The vacancy rate is really low, and while we do have some turnover, when space comes to market, it is getting leased quickly,” Walter Pagel, SVP at CBRE, tells GlobeSt.com. “That is a lack of quality space to lease. This is a tight market. I don’t see retail spaces sitting on the market for an extended period of time, unless there is a story or a problem with the center.”

The lack of quality space is interesting, considering major store closures, like Toys R Us, have brought new product to market. However, those big box spaces have been rapidly absorbed as they have come to market by expanding retailers in what are known as the Five F’s” furniture, food, fitness, fun and fashion. Pagel would exclude fashion from the list; he says it hasn’t been a major driver of activity, especially in the big box space. The remaining four, however, have driven leasing activity in general and backfilled big box locations. “These are the companies that are out looking for deals, and they are paying decent rents,” explains Pagel. “They are filling a lot of the boxes. Not only do you have the traditional retailers that you would normally go after, like soft goods retailers and fashion, you also have these new uses. There is a big mix. The challenge is that there may be co-tenancy problems or tenant crossover, but aside from that, there shouldn’t be a hard time filling boxes.”

New construction is ramping up to solve the supply issue. The market currently has 111,000 square feet of retail space under construction, although there were no major construction starts in the second quarter. However, there are more than 250,000 square feet of retail projects in the planning phase. The development is a good signal of the health of the market and good leasing activity to come. In fact, some of the projects have already seen pre-leasing activity. “We are going to see steady growth, and good activity from a mix of tenants,” says Pagel. “We are seeing a decent amount activity for smaller boxes, in the 20,000 to 30,000 square foot range. People can say that retail is dead, but I don’t think the numbers show it. Lease rates are high and vacancy rates are low, so the numbers don’t show the end of retail.”