Retail Building Weathers Slump : Economy: A 4.5-acre Costa Mesa project and South County retail construction help that sector of the development industry as office and factory space go begging.

Across Orange County, millions of square feet of office and factory space lie vacant, built by developers who gambled that enough tenants would materialize to fill all those shiny new buildings.

For a number of reasons--among them high vacancies, tight credit and the recession--the county’s building boom halted last year.

Except in retail. Consider these figures:

Developers got permits from Orange County and its cities last year to build $214 million worth of stores and shopping centers, an 11% increase over the prior year.

While that was going on, permits for office buildings dropped 41% to $232 million.

Permits for industrial buildings--light manufacturing buildings, warehouses and the like--fell by a steep 57% last year, to $61 million. And hotel construction permits dropped 54%, according to the Construction Industry Research Board, which tracks permits for the building industry.

What’s going on?

One fairly large retail project--Triangle Square in Costa Mesa--got under way last year, pumping up the total of building permits by at least $40 million. Without it, retail construction, too, would have showed a slight drop.

But the figures also show something developers have known a long time: that retail projects are far less volatile than building offices, say, or hotels. Make no mistake, retail construction will probably take a big dip, like every other type of commercial building. There are a couple of reasons:

The recession is expected to hold retail sales in the county down to about $30.5 billion this year, according to a forecast by Chapman College economists. That’s only a 4.8% increase, below the expected rate of inflation, so the sales gain in terms of real dollars will likely be minimal.

The retail problem will be compounded by the financial woes of many of the department store chains and mergers among some supermarket chains, which will mean fewer big tenants looking for new store space during the early part of the decade.

But experts say the drop in retail construction will likely be far smaller than what’s expected for offices, hotels and industrial buildings.

“People still have to buy food, no matter what the economy’s doing,” says Scott Perley of the commercial brokerage Cushman & Wakefield. “So stores are going to keep being built as long as the population keeps growing.”

Nearly three-quarters of the new stores and shops built in the county last year, in fact, were in the relatively undeveloped southern half of the county, says the Coldwell Banker brokerage. That’s where most of the new homes are built and where most of the population growth is.

Most of the new construction is in what the industry calls neighborhood centers--usually about 25,000 square feet--or in even smaller strip shopping centers, says John Ollen, a Coldwell executive.

In some parts of the county’s older, northern half, however, many mom-and-pop pizza parlors, video stores and other small businesses are being squeezed by the arrival of regional and national chains such as Blockbuster video stores or Domino’s Pizza.

“We see a lot of the mom and pops falling by the wayside if they’re not in a prime location,” says Jeffrey Bitetti, senior marketing associate at the Scher-Voit brokerage. “A lot of them are going to drop out because they don’t have the financial capacity to hang on in a down market.”

Retail buildings are usually built on a far less speculative basis than, say, offices. The builder of a grocery store or a theater usually won’t put up a building without a tenant in mind. Office developers, however, have often built with no particular tenant in mind--at least until the market began to slump.

Retail vacancies, although growing, tend to be lower than office vacancies, commercial brokers said. And retail rents aren’t as high as most landlords would like.

In much of the central part of the county--from Huntington Beach to Garden Grove and into Anaheim--there is an oversupply of retail space, says John Davidson, a broker at Grubb & Ellis.

“A lot of property in those areas was zoned retail, so people built on them,” Davidson said. “The good stuff, with a great location, rented up. But the lousy stuff didn’t.”

But cities such as Brea and Yorba Linda, said Davidson, controlled growth tightly and landlords there don’t have the same sorts of problems. And the population of South County is growing so fast in places such as Dana Point and Laguna Niguel that there is a scarcity of retail space and rents are fairly high.

Some cities in North County are redeveloping older commercial districts with spiffy new shops and precious little restaurants. The downside is that these gleaming new projects sometimes replace the mom and pops that thrived on low rents when the neighborhood was less gentrified.

One redevelopment project is Triangle Square, which is taking shape on a triangle-shaped lot of 4.5 acres at the corner of Harbor and Newport boulevards in Costa Mesa. This area used to be Costa Mesa’s old downtown before the city’s focus moved inland in the late 1960s to the South Coast Plaza mall and the phalanx of office towers around it.

The place will include 185,000 square feet of retail space, including eight movie theaters, a supermarket, restaurants and shops. All of this is designed in the ubiquitous Mediterranean style and arranged around a half-acre open square.

The project, which looms over the surrounding neighborhood, is expected to open in the summer of 1992. It is a joint venture between a group of Americans and a British shopping center developer called Capital & Counties, which also owns Ghirardelli Square in San Francisco.

“There’s been a pent-up demand for retail in this area,” says Richard Shapiro, one of the American partners, in explaining why the project is under construction now. “There’s been relatively little retail construction, and no new supermarkets built for years, and we expect demand from retailers to be very strong when we open next year.

“And you have two of the busiest streets in the county intersecting here.”

Then there’s the other approach: The new South County town of Rancho Santa Margarita is building its own downtown from scratch, from the ground up.

The new downtown will eventually replace open fields with 600,000 square feet of retail space, as well as 3,000 homes and 10 million square feet of business space.

The first phase began last month when developer Santa Margarita Co. signed Vons Companies Inc. to anchor a 15-acre shopping center, the first big retail tenant for the downtown project.

New Stores in Store for Orange County Construction of retail buildings in Orange County was steady last year, most of it in South County, even as other types of construction dropped sharply. Experts say this year may see retail construction drop too, but not as sharply as other categories, such as office construction. Shopping Center Construction In thousands of square feet: 1986: 33,145 1987: 35,899 1988: 37,565 1989: 39,138 1990: 41,183 South County Leads The Way Where new retail construction took place in 1990,, in percent of total: North County: 14% South County: 74% Central County: 12% Source: Coldwell Banker Commercial Real Estate Retail Building Holds Steady Value of building permits in millions of dollars: Industrial 1988: 141 1989: 142 1990: 61 Retail Shops and Stores 1988: 261 1989: 193 1990: 214 Office Buildings 1988: 437 1989: 393 1990: 232 Source: Construction industry Research Board