The so-called demise of brick-and-mortar retail as ecommerce continues to take market share is a frequent headline these days, but it doesn’t tell the whole story. While it’s true that some retailers are shrinking and demand for space has decreased in certain tertiary markets in the U.S., densely populated, urban markets like Orange County are thriving.
With few sites available for ground-up development, the infill nature of Orange County means we’ve seen a trend toward redevelopment of existing space, most notably from vacating department stores such as Sears and Macy’s. While some may view store closings as negative, the owners of those properties have welcomed the news, taking advantage of the opportunity to improve their properties.
When Macy’s vacated The Irvine Company’s Spectrum Center location, the 140,000-square-foot building was torn down to make way for a $200-million redevelopment, which will house an H&M, Sephora and 30 other tenants. At the Brea Mall, Simon Property Group is in process of redeveloping a vacant Sears building into a mix of residential, food, entertainment and fitness retail. Their premier tenant is a massive, 120,000-square-foot Life Time Fitness, a flagship location for the high-end fitness brand. Further, the Sears at South Coast Plaza was recently purchased by the mall’s ownership and will soon undergo redevelopment to potentially include a food hall. These vacancies are proving to be opportunities to welcome retail’s next wave.
Who are we seeing absorb the available space in Orange County? Fitness centers are popping up in some of these large spaces as the next generation embraces wellness along with, believe it or not, online retailers. Online retailers are realizing that brick-and-mortar locations increase their traffic when a store is opened in a particular location and decrease their costs since customers can visit a store for returns and, potentially, spend additional dollars. Warby Parker, Bonobos, Casper and others are embracing the trend and opening stores in the county.
Food Halls are also taking off as more disposable dollars are spent on quality cuisine and experiences. In 2018, we saw the opening of Lincoln Property Company’s TRADE Food Hall in Irvine, which has been a huge success. Lincoln is adding another food hall to Orange County with Mess Hall at their Flight at Tustin Legacy office development. Kearny Real Estate has plans for a significant food hall component at The Press in Costa Mesa in partnership with LAB Holdings, a pioneer in Orange County’s “cool retail” scene as the owner of The Lab and The Camp in Costa Mesa. In short, Orange County’s consumers are no longer looking for chain restaurants; unique food experiences are in focus.
What does this mean for investment sales in the county? Orange County had some of the lowest cap rates in Southern California. A new, small-format, Target-anchored shopping center in Orange, California, (Rusty Leaf Plaza) and larger strip center in Irvine, California, (Jamboree Promenade) traded at $31.75 million and $42.5 million, respectively, both at cap rates inside of five percent. Larger trades included the $80 million sale of Anaheim Gardenwalk in Anaheim and the $65 million sale of Edinger Plaza in Huntington Beach. Even more interesting, the buyers for all the above-mentioned properties came from outside of Southern California, showing the attractiveness of the strong fundamentals in Orange County.
With a vacancy rate of 3.5 percent county-wide (according to CoStar), the fundamentals in Orange Country remain strong, and we anticipate strong investment from domestic and foreign capital in 2019 and beyond.
Gleb Lvovich is a managing director in HFF's Orange County office. He has more than 14 years of experience in commercial real estate and focuses primarily on retail investment advisory transactions throughout the western United States. He has been instrumental in the disposition of more than $5 billion in transactions throughout his career.
Originally published in Western Real Estate Business Magazine.