What Recession? Retail Market Just Fine With Realtors

Although retailers have been hit hard during this recession, Orange County’s retail market has been healthy from the standpoint of real estate brokers, a local brokerage company said Thursday.

Competition among large grocery and drugstore chains like Albertson’s, Target and Walmart has kept rents high, said Mike Navarro, director of the retail division for Grubb & Ellis, which released its second-quarter report on the Orange County real estate market.

Navarro said that Salt Lake City-based Smith’s Food King, the food and drug retailer, will be opening 50 to 60 new stores in Southern California in the next five years, and that news is keeping competitors on their toes.

Fast-food restaurants and banks are also expanding in response to a hotly competitive market, he said.

“Our revenues have fared well through rough and tough economic times,” Navarro said.

But mom-and-pop retailers are having a tougher go of it. Navarro said that landlords are having trouble filling small spaces in existing shopping centers, and are offering lower rents to small, independent retailers as a result.

Rents in South Orange County have dropped from $2.25 a year ago to $1.80, Navarro said. In the downtown areas of central Orange County, rents are as low as $1 a square foot. Countywide rents should stabilize soon at an average of $1.35 to $1.50 a square foot, he said.

That contrasts with about $10 to $15 a square foot for large tenants of shopping centers, Navarro said. In the 1980s, shopping center landlords often subsidized rents to attract large tenants, Navarro said.

The main trend in the office market during the second quarter was consolidation. Companies moved to smaller offices, which accounted for a drop in absorption of vacant office space of more than 50% during the first half of this year, said Pat Papaccio, a director of Grubb & Ellis’s office division.

For the first time since 1984, more office space was absorbed during the second quarter than new space came on the market, Papaccio said.

Absorption, which is the net change in occupancy, totaled 378,958 square feet in the first half of 1991, contrasted with 1.6 million square feet for the same period last year. Papaccio said he expects the trend to continue through the end of the year.

However, office vacancies in the county dropped to 21% in the second quarter from 23% for the same period a year earlier, Papaccio said. The decline is the result of a fall-off in new construction as developers face a tight credit market.

Office tenants have benefited from high vacancy rates as desperate landlords offer a month’s free rent and other incentives to attract tenants. Some companies have taken advantage of such incentives to move up to fancier quarters.

Grubb & Ellis reported that five top-flight office towers in Orange County have an average occupancy of 91%. They are: Xerox Centre in Santa Ana; Stadium Towers Plaza in Anaheim; and Koll Center Orange, Tishman Executive Tower and a new tower in The City, all in Orange.

O.C. Office Market

The net amount of office space under lease increased by 379,000 square feet in the first half of the year, by far the lowest mid-year absorption rate in the last five years.

In thousands of square feet, first six months of each year

1986: 1,358

1987: 2,462.5

1988: 1,898

1989: 1,895.1

1990: 1,561.3

1991: 378.9

Source: Grubb & Ellis