Report: Orange County Retail Market Sees Increased Leasing Activity, Positive Net Absorption in Third Quarter

CBRE Orange County Retail

By Catherine Sweeney 

From the rise of e-commerce to issues in supply chain structures caused as a consequence of the global pandemic, the retail sector has faced many challenges over the last couple of years. Despite this, Orange County saw some signs of positive growth in its retail market during the third quarter of the year. According to a third quarter Orange County retail market report from CBRE, the region recorded its first positive net absorption since the second quarter of 2019 and is continuing to see a declining vacancy rate. 

Although year-to-date net absorption remains negative at 175,186 square feet, the third quarter marked positive net absorption of 70,268 square feet. At the same time, Orange County’s vacancy rate fell approximately 20 basis points quarter-over-quarter to 4.7 percent. Average leasing rates, however, remained unchanged quarter-over-quarter at $2.82 per square foot.  

“The retail market is in the process of recovering in Orange County when compared to a year ago. Consumers have had a lot of pent-up demand, which is apparent in our retail sales growth metrics. Additionally, Orange County currently doesn’t enforce a mask mandate, as opposed to Los Angeles County for example, which has resulted in a comparatively larger number of people out in restaurants and stores,” said Kurt Strasmann, executive managing director of CBRE’s Newport Beach office. 

According to the brokerage firm, positive net absorption during the third quarter of the year was primarily a result of small tenants leasing an average of 4,000 to 10,000 square feet, such as Big 5’s 12,304 square-foot lease at Heritage Plaza in Irvine. However, several larger leases also were signed over the course of the quarter. These include Life-Time Fitness’ 90,000 square-foot lease at Lakeshore Tower in Irvine, and Nordstrom Rack’s 34,439 square-foot lease at Edinger Plaza in Huntington Beach.

“During the last couple of months, retailers have again started to look at new openings and potential expansion in many markets. This is a fresh breath of air and has resulted in a more positive outlook on the regional business,” Strasmann said.

He continued, “[The retail sector] has improved significantly, but remember the improvement is compared to an all-time low. There is still much room for improvement, but the fundamentals are looking better as evidenced by consumption in many sectors.”

While seeing improvements, retail assets in Orange County are still in the process of overcoming a number of challenges, according to CBRE. Investment in brick-and-mortar retail still remains relatively stagnant as a result of the COVID-19 pandemic causing consumers to turn to online shopping. Since this remains an issue, CBRE suggests many retailers will have to develop high quality shopping experiences as a way to draw more consumers into brick-and-mortar storefronts. 

In fact, the report showed that a slowed consumer activity at many brick-and-mortar retail centers has slowed the increase in retail rental rates, despite the decrease in vacancy. While there was no change in rental rates quarter-over-quarter, the year-over-year average asking rate declined approximately 1.4 percent. 

“The biggest challenge remains the trajectory of the global pandemic and what the situation with COVID-19 is ahead and during the holidays. Next are the supply chain constraints, which are resulting in massive delays of certain products. Then there are inflationary pressures we are starting to see across all sectors, which affect purchasing habits. Lastly, the e-commerce effect is still evolving and growing, which in turn changes retailers’ brick-and-mortar strategies,” Strasmann said. 

Despite these challenges, retail sales are continuing to pick up, with Orange County currently accounting for two percent of the nation’s total retail sales, according to the report. In the third quarter, total retail sales grew by 4.6 percent annually and are estimated to total $50.8 billion by the end of 2021. This is only expected to increase, with CBRE predicting a 2.4-percent increase in sales in Orange County over the next five years.

Overall, CBRE predicts the market will continue to see increased amounts of activity as local and state governments learn to manage the COVID-19 pandemic.  

“We expect the market to slowly return to normal but with lots of new players. A variety of new retailing looks will emerge that will be exciting to watch but that will also make it necessary for retailers to embrace new strategies and stay flexible and nimble,” Strasmann said.