Retail Real Estate Bloom Beginning to Look a Bit Faded

Orange County’s retail real estate market, bustling with construction and leasing activity over the past five years, has begun slowing down and could even enter a slump by the end of next year, according to specialists at Coldwell Banker.

Overall, the market still is “vibrant,” said Robert A. Peterson, vice president of the national realty company’s commercial services division. But “retail is feeling the weight of excess supply of space.”

Peterson, speaking at Coldwell Banker’s annual midyear real estate forecast for the county, said several factors have combined to create that excess space in the neighborhood and community shopping center market, which he defined as centers offering from 60,000 to 500,000 square feet of leasable space:

- Major retail tenants still have a strong interest in locating in Orange County, which has continued to stimulate new construction. At the same time, however, consumer spending has increased only moderately, which increases competition, has lowered retailers’ profit margins and signals a potential slowing down in demand for the largest stores.

- The same competitive pressures have kept a tight lid on the number of new “mom and pop” stores--the shoe shops, clothing boutiques and other retailers that typically rent smaller spaces in neighborhood centers. And that competition could force a number of small store closures in the next few years, increasing the vacant space for lease in existing centers and further reducing demand for space in the new centers now being built or planned for the near future.

- The wave of mergers and consolidations, particularly in the supermarket business, has emptied a number of large facilities and created an unexpected surge in vacant space.

As a result, Peterson said, retail vacancy rates in the county have increased to 6%from 5%in January. While the increase is troublesome, he said, the rates are still comparatively low.

Operators of the county’s major regional malls should not be affected by the market slowdown, Peterson said. The first to suffer will be the myriad strip commercial developments that have sprung up in the county in the past two years, as well as larger retail centers in secondary locations--away from major intersections.

In other comments on the retail scene, Peterson said he believes that the next wave of mergers and consolidations will see a reduction in the number of discount retail warehouses like Price Club, Costco and Price Savers, which would open some of those large facilities for other retail uses and further depress the market for newly built space.

He also speculated that an anticipated major regional mall in the Irvine Center area--a triangle formed by the Santa Ana, San Diego and Laguna freeways--could be delayed because of Macy’s acquisition of the Bullock’s chain.

The Irvine Co. has said it will not build a mall unless it can bring a new anchor--such as Macy’s--to make it more competitive with the county’s other malls. But Macy’s, Peterson said, may not be eager to begin competing directly with its newly acquired Bullock’s stores.

An Irvine Co. spokeswoman said that negotiations with Macy’s are on hold but that planning for the mall, such as design work and negotiations with other potential anchors, is proceeding.

Overall, Peterson said, the huge demand for retail space that has existed in the county since 1983 has created a very strong market that remains healthy but is starting to slow.

Developers opened up 1.2 million square feet of new retail space in the county in the first half of the year, have 1.8 million square feet under construction in the county and 3.4 million square feet on the drawing boards.

Unless that pace of new construction slows considerably, or developers find new ways of luring tenants, Peterson said, “there is the distinct possibility of overbuilding within a couple of years.

“Tough times may not be here this year, but at the current pace, they will arrive shortly,” he said.

RETAIL SPACE IN ORANGE COUNTY Retail space in thousands of square feet in shopping centers with at least 60,000 square feet.

Total New Space % Increase 1/1/85 31,586 2,306 7.3 1/1/86 33,146 1,560 4.9 1/1/87 35,899 2,753 8.3 1/1/88 37,565 1,666 4.6 1/1/89 (Projected) 40,546 2,981 7.9

Source: Coldwell Banker