Retail Capital Markets

Orange County

10/25/20242 min read

In 2024, Orange County's retail market has hit a bit of a slowdown, with buyers taking a cautious approach due to rising borrowing costs and stricter lending criteria. Sales volume dropped to a nine-year low of $938 million in 2023 and is expected to decline even further this year, with just over $500 million in sales recorded in the first three quarters. As a result, some local investors are looking beyond coastal areas for better returns, especially toward nearby Phoenix.

Reflecting a national trend, private buyers make up nearly 70% of investment activity in Orange County. In contrast, institutional investors, private equity firms, and REITs account for over 20%, with users representing the remaining 10%. These ratios have remained fairly steady over the past year. Notably, cap rates in Orange County are generally lower than in many other U.S. markets, largely due to significant barriers to entry.

On the consumer side, purchasing power is robust, thanks to high incomes and job growth. However, recent interest rate hikes have pushed cap rates up, averaging 5.5% in 2023 compared to an all-time low of 4.8% in 2022. Currently, cap rates tend to fluctuate between 5% and 6%. For instance, in September 2024, a 25,000 square foot building in Aliso Viejo Town Center sold for $9.4 million, or $376 per square foot, with a cap rate of 6.3%. The ground floor houses popular tenants like Buffalo Wild Wings and Cold Stone Creamery, while the second floor had 7,580 square feet available for lease at $23.40 per square foot, triple net.

On the lower end of the cap rate spectrum, a nearly 90%-leased 21,400 square foot strip center in Corona Del Mar sold for $7.8 million, or $363 per square foot, with a cap rate of 5.25% in August 2024. Ongoing rent growth is helping to cushion some of the pricing pressures from higher cap rates. However, the recent sale of the South Coast Collection (SoCo), a nearly 300,000 square foot interior design center in Costa Mesa, highlights the impact of cap rate inflation on asset values. Rockwood Capital, based in San Francisco, sold the property for $110 million—$10 million less than their original purchase price in 2015—while maintaining a 97% occupancy rate and a cap rate of 5.25%.

Overall, while there are challenges in the current market, some opportunities are still emerging for investors who are willing to adapt.

Source: CoStar Research