RETAIL EVOLUTION

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Hanna
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RETAIL EVOLUTION

Post by Hanna » Sun Jun 24, 2007 7:56 pm

Orange County Business Journal

RETAIL EVOLUTION
By Dan Beighley - 6/25/2007
Orange County Business Journal Staff

The District at Tustin Legacy, the county’s largest shopping center development in the past 10 years, is part of a dying breed.

Land for big shopping centers is nearly impossible to come by, forcing developers to redevelop existing sites or lobby cities to zone for more shopping.

Cities, of course, love shopping centers for the sales taxes they generate. But cities have to balance retail zoning with the need for houses or even office and industrial developments. Others are worried about losing their small-town character with the arrival of big national retailers.

“Orange County has become similar to L.A., it will take some creativity to find new places to build,” said Don MacLellan, managing director of Irvine’s Faris Lee Investments, a brokerage that specializes in shopping centers.

Even the developer of the 1 million-square-foot, $300 million District would take more space if it could get it.

“We want to do a lot more but it’s hard to find 100 acres,” said Jeff Axtell, project manager for developer Vestar Development Co. of Phoenix.

The local retail real estate market is off its peak but still is “one of the strongest retail climates in the nation in terms of per capita spending,” Axtell said.

And space is tight. In most parts of the county, the retail vacancy rate is less than 1%.

Big retailers are driving the local retail market, said Phil Voorhees, senior vice president at CB Richard Group Inc.

“It’s a dynamic economy,” he said. “Even after the dot-com blowup there wasn’t much of a slowdown here.”

The housing slowdown is more of a threat to the county’s retail market.

So far, “Orange County hasn’t been hit by housing as much,” said MacLellan of Faris Lee.

That’s in part because retail developers have been playing catch up with the housing boom that peaked in 2005.

But the retail market is showing signs of maturing.

Take prices. Even small centers are commanding top dollar. Magnolia Plaza shopping center in Fountain Valley, a 5,042-square-foot strip mall, recently sold for nearly $800 per square foot.

The cost to buy centers is way up even as expected returns from rents are down.

Higher interest rates are another concern.

The rate on the 10-year Treasury note is more than 5% now, up from 4.6% two months ago. That’s prompted some to speculate that the cheap financing of the past few years, which fueled everything from the housing boom to a wave of private equity buyouts, is coming to an end.

“People might be a little cautious with rates creeping up,” MacLellan said. “The fundamentals of retail investing in Orange County have changed.”

Interest rates will have a direct effect on the market, especially with foreign investments, according to MacLellan.

There also are concerns about how rents will keep up with the cost to buy shopping centers.

The ability for centers to pay for themselves through rents, as measured by capitalization rates, is at a historic low in the county and hasn’t budged since fall.

If the cost to buy moves higher, landlords will require even higher rents, raising questions for the market.

“In the past cycle, tenants have been able to step up and pay higher rents,” Voorhees said.

Cap rates vary widely depending on the center, which makes it difficult to generalize, according to Voorhees.

“Retail is a wild animal,” he said. “It’s harder to follow than other real estate.”

Vestar’s District at Tustin Legacy has lured big retailers including Target, Lowe’s, Whole Foods and AMC Theatres. In all, there’s set to be 70 stores when the center is done.

Construction is expected to be 98% done by the end of July, Axtell said.

“The stores that have already opened are doing fantastic,” he said.

The project, which also includes some office space, broke ground in spring 2005 at the former Tustin Marine base. Homes are going up around the center.

Vestar isn’t concerned about diluting the market, Axtell said, even though The Market Place mall straddling Irvine and Tustin is nearby (see story, page 1).

“With 4,600 residences being built around the District, it’s a highly attractive location for retailers,” he said.

Elsewhere in the county, Craig Realty Group and SDC Partners Ltd., both of Newport Beach, are building about 600,000 square feet of retail space in San Clemente.

Craig Realty develops outlet shopping centers around the country.

San Clemente is seen by some as lacking in retail space, with many residents shopping in Mission Viejo.

The project, tentatively named The Plaza at San Clemente, should be done by the end of next year.

The idea is to build a themed mall for upscale shoppers. Shops are set to include Pottery Barn, Talbots and Williams-Sonoma. A theater, restaurants and hotel also are planned.

Irvine-based Hopkins Real Estate Group is developing 180,000 square feet of retail space in Cypress near the Los Alamitos racetrack.

Hopkins and Costa Mesa-based Arnel & Affiliates are redeveloping the 220,000-square-foot Imperial Promenade shopping center in La Habra, at the site of a former Kmart.

Newport Beach-based Makar Properties LLC plans about 200,000 square feet of retail as part of its Pacific City development in Huntington Beach, which includes a hotel and condominiums.

For big retail developments, there’s only a few options in the next five to 10 years.

One is Rancho Mission Viejo Co.’s land in South County, where 14,000 homes and 5 million square feet of commercial development, including retail, are planned.

The land is the last big chunk of developable space in the county.

The other is the former El Toro Marine base, where Lennar Corp. plans thousands of homes as well as retail and other commercial space.


Beyond that, retail here is a matter of redevelopment, as Lennar is doing at Anaheim’s Platinum Triangle.

Jamboree Road in Irvine, where condo towers are going up, could see rezoning to bring stores alongside homes, according to MacLellan.

Diamond Jamboree Center, an Asian-themed mall, is in the works at Alton Parkway and Jamboree.

Developers are swooning over rezoning prospects, though getting approval for projects isn’t easy.

Centers that aren’t doing as well as they could be are possible overhaul candidates.

Bella Terra Huntington Beach, formerly the ailing Huntington Beach Mall, last year wrapped up a multiyear makeover.

Brea Marketplace, across from Brea Mall, is a possible makeover candidate, according to some observers. Target reportedly has expressed interest in the 300,000-square-foot center.

http://www.ocbj.com/industry_article_pa ... ID2=114814

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