By Glenn R. Rudy, Senior Director Director, Retail capital markets, Newmark Knight Frank
We all know that the commercial real estate industry is cyclical and there are casualties in every cycle across all asset classes. However, retail still seems to be on everyone’s radar. Quite often, the tail is wagging among institutional investors. Consider this, though: if there’s one thing the pandemic has proven (again), it’s that the retail sector as a whole is one of the most resilient in the industry.
Nowhere in the country is this statement more evident than here in Orange County. While investment sales activity was sluggish overall in 2021, largely picking up in the fourth quarter, retail leasing activity broke records. Annual net absorption turned positive after nine consecutive quarters of losses. Vacancy rates have yet to return to pre-pandemic levels, but rent growth hit a new all-time high at the end of 2021.
Both tenants and landlords were motivated to sign leases in 2021 to satisfy increased consumer market demand to get out and be social again. The company wanted to spend its money on textile products, eat out and enjoy the retail experience we sorely missed in 2020.
On the investment front, U.S. retail sales for 2020 were a paltry $40 billion, down more than 55% from the peak investment year of 2015. Investment sales surged in 2021, recording more than $76 billion in overall activity. Almost half of that happened in the fourth quarter of 2021. Orange County ranked as the 10th busiest retail investment market in the nation in 2020 and 15th in 2021 as capital was attracted to historically less active suburban markets like Phoenix, San Diego and the Inland Empire. . This was largely due to the flight of COVID from primary markets. As we begin the new year, Orange County has already recorded some of the largest individual retail sales in the western United States, including Brea Gateway for $85.7 million and Gateway Shopping Center in Mission Viejo for $33.5 million.
After a tumultuous year in 2020, the Orange County labor market is recovering rapidly. While the turn of the calendar saw 47,000 job losses, nearly 150,000 payroll additions since then are a testament to economic resilience. Leisure and hospitality, which saw the biggest decline in jobs in 2020, saw the strongest job growth of any industry. Commercial transportation, utilities, and professional and business services made up the balance.
Going forward, all will be watching the enduring saga around COVID-19, but CRE’s eyes will be watching inflation and federal government benchmark moves closely. Despite this, retail activity in Orange County and the majority of the United States is expected to continue its unprecedented momentum throughout 2022, primarily due to the immense amount of capital seeking to be put into to contribute after being sidelined for almost 24 months. Fasten your seat belts. It looks like it should be a very liquid time for quality retail.