Retail, Restaurant Properties Hold Their Own

It’s been a tough year for many retailers and restaurant operators in the Fountain Valley area and throughout Orange County. Closures and bankruptcies have become all too common. That has slowed leasing and purchasing of retail and restaurant buildings. But as with the housing market, opportunity can come on the heels of adversity.           

Pricing and rental rates are relatively low, as are interest rates. And in many cases, owners and sellers are willing to negotiate pricing and terms. There seem to be plenty of vacant buildings to choose from; Fountain Valley has more than a dozen retail and restaurant buildings up for sale or rent, ranging from 500 square feet to nearly 5,000 square feet.           

Rental rates are considered low, especially for larger retailers and restaurant chains. Average asking rental rate for retail space in Orange County stands at about $2.27 NNN per square foot.           

NNN refers to a lease agreement that requires the tenant to pay, as additional rent, its proportionate share of real estate taxes, building insurance and common area maintenance, such as landscaping. Fountain Valley has retail buildings with rental rates generally in the $1.20-to-$1.65-per-square-foot rental range.

Financing ability for retail and restraint properties has also improved in the past year.           

Another positive aspect is openings vs. closings. Although at least 60 restaurants closed countywide in 2010, more opened than closed according to the Orange County Health Care Agency. The number of restaurants in the county increased from 8,042 in 2009 to 8,070 in 2010, for a gain of 28 restaurants.           

Experts expect commercial pricing and rents to fall further this year before stabilizing, and space demand should start to pick up before year’s end.           

Employment growth will be a big factor in how soon demand will pick up and how strong it will be. Marcus & Millchap of Encino, Calif. expects an increase in hiring--needed to drive a rebound in retail demand could materialize sometime this year. Part of that increase could come from an expected jump in tourism in 2011.           

Construction remains at modest levels, so new and existing retail space should see better demand this year. About 218,000 square feet of new retail space came on line in Orange County in 2010, down from 750,000 square feet of new retail space in 2009. Publisher Western Real Estate Business reports that retail development in Orange County remains practically nonexistent.           

Marcus & Millchap reports that with store sales declining, tenants have successfully negotiated short-term lease adjustments. Owners have lowered asking rents by 5.9 percent over the past year. That trend to reduce rents is expected to continue, but not as sharply.           

Western Real Estate Business expects retailers who survived the recession to move forward with stalled expansion plans, taking advantage of the low lease rates and motivated landlords who have been sitting on vacant space. And restaurant business is expected to pick up.           

Americans spend about 48 percent of their food dollars on eating out, according to the National Restaurant Association. That percentage has nearly doubled since the 1950s. Despite the still sagging economy and job market, Americans will continue to eat out on a regular basis. But they do expect good food for their money and superior service. Buyers and renters of restaurant space for a new eatery should always keep that in mind.