Third Quarter 2024
Orange County’s Retail Market Continues to Adapt
As retailers, investors, and developers adapt to evolving market conditions, they demonstrate resilience.
Despite challenges from a shifting economy, demand for retail space continues to evolve.
MARKET OVERVIEW
Orange County’s retail market recovery in 2024 has been sluggish, with the evolving economy dampening demand for retail space in the second half of the year. Landlords are seeing slow progress as retailers gradually return to brick-and-mortar locations vacated during the pandemic.
A wave of bankruptcies among major retail chains—including 99 Cents Only Stores, Rite Aid, Big Lots, and The Franchise Group Inc. (owners of The Vitamin Shoppe, Pet Supplies Plus, and Buddy’s Home Furnishings)—has added to the strain. These closures, driven by declining revenues alongside rising supply chain and labor costs, have created additional challenges for the market.
Despite these obstacles, recovery is underway. Total vacant square footage declined by 725,670 square feet compared to Q3 2023, leaving the total slightly above 5.8 million square feet. However, occupancy remains 1.1 million square feet below Q2 2020 levels, when the wave of pandemic-driven vacancies began. The current vacancy rate stands at 4.1%—a 20-basis-point decline quarter-over-quarter and 50 basis points lower than the same period last year.
Landlords have softened rents to attract tenants, resulting in a 1.2% quarter-over-quarter drop in average asking rents and a 0.8% year-over-year decline, bringing the average to $2.44 per square foot. Leasing activity has slowed, with leasing volume down 29.6% quarter-over-quarter. Year-to-date leasing totaled close to 2 million square feet, a 10.1% decline compared to last year.
Sublease vacancy declined by 5.2% quarter-over-quarter as retailers capitalized on excess capacity, bringing the total 9.4% lower year-over-year to just under half a million square feet. Meanwhile, the average sale price per square foot fell 11.6% year-over-year to $435, despite a 21.4% quarter-over-quarter increase in sales volume, which totaled $432 million year-to-date.
Construction of retail space also slowed, with square footage under construction declining 22.6% quarter-over-quarter to 186,788 square feet—a 1.6% drop compared to the same period last year.
While progress remains uneven, Orange County’s retail market continues to make strides toward pre-pandemic stability.
TRENDS TO WATCH
Consumer spending remains a driving force in the retail market, demonstrating resilience as retailers, investors, and developers adapt to evolving opportunities. Despite challenges from a shifting economy, demand for retail space continues to evolve, with investor interest in prime locations holding steady.
Fast-food chains are particularly active in pursuing prime sites. In Central County, In-N-Out Burger is constructing a 3,885-square-foot store, marking its fourth new location in Orange County this year. Similarly, Chick-fil-A is building a 4,000-square-foot store in West County, also its fourth new location of the year. Starbucks has added four new locations, while Raising Cane’s and 7-Eleven each opened two stores across the county.
Meanwhile, the collapse of the proposed Kroger-Albertsons merger—poised to become the largest U.S. supermarket merger in history—has averted a significant potential disruption in the grocery sector. However, new challenges continue to emerge. Walgreens, facing what its CEO has called a “challenging” environment for pharmacies and U.S. consumers, is preparing to implement its “footprint optimization program,” which includes closing 500 locations by 2025.
Amid these shifts, demand for reliable and proven retail concepts remains strong. Investors are strategically acquiring prime real estate, focusing on transforming outdated spaces into dynamic community hubs. These redevelopments often prioritize quick-service restaurants with drive-thrus, dining, and entertainment to meet evolving consumer preferences. By backfilling vacant spaces, this approach supports stable occupancy levels and drives organic growth over time. In South County, Amazon Fresh is nearing completion of its 45,000-square-foot store, redeveloping the former Dick’s Sporting Goods location at Laguna Hills Plaza.
For landlords, the changing retail landscape presents an opportunity to reposition assets and attract diverse tenant mixes that align with current trends. Developers are increasingly embracing community-centric retail, integrating local culture and new experiences to attract foot traffic and boost sales.
As the retail market continues to evolve, adaptable and forward-thinking players are well-positioned to thrive. The transformation of underutilized spaces into vibrant, mixed-use hubs reflects a shift toward innovation and resilience, ensuring the retail sector remains a cornerstone of Orange County’s economy.
