Retail, Build-to-Suit Office Sectors Hot

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IRVINE, CA-Now that the housing recovery is well on its way, the commercial real estate industry is eyeing new sectors that will drive Orange County’s economy.  According to speakers at RealShare Orange County here yesterday, in addition to the continuing strength of the multifamily market, those driving sectors are retail and office—particularly build-to-suit office.

Calling retail “the caboose on the recovery end,” Chris Hite, president and founding principal of Coreland Cos., said this sector is “just feeling the effects of the rising housing market.” He pointed out that while the 10-year T-bill—which, as Kurt Strasmann, senior managing director of CBRE, pointed out, has risen 110 basis points in the last 120 days—has some industry experts worried about a potential slowdown, it doesn’t seem to be affecting net-lease retail investments.

Despite the challenges facing the bricks-and-mortar retail sector—namely, competition from e-commerce and a series of consolidations that has left a lot of empty big-box space—Hite said the long-term outlook for the sector is positive. Dollar stores are enjoying a flight to quality and have lost the stigma they once had for consumers, who have been frequenting these stores as a way of making ends meet during tough economic times.

Hite and other experts maintained that bricks-and-mortar shops are not going away and that not all retail purchases can be done via e-commerce, especially perishables and health/fitness centers. The future of bricks-and-mortar stores lies in destination retail, he said, which is largely about the experience of going to the store and getting sensory feedback from the space and the products.

Ed Hanley, president of Hanley Investment, echoed Hite’s sentiments, saying “my retail transactions have close to doubled, and wealth preservation is the main reason.” He added that investors see this sector as a safe haven with good, steady returns.

“Retail has been beaten to death,” Hanley commented. “There were once plenty of holes due to vacancies. But with a 6% retail vacancy rate in Orange County, it’s a great time to buy retail product right now.”

Meanwhile, build-to-suit space is the next wave in the office sector, speakers said. Joaquin de Monet, founder and CEO of Palisades Capital Realty Advisors and former president and CEO of Arden Realty Inc., said that while bifurcated, the office sector has seen 13 quarters of positive absorption, and while there is still a lot of vacant space—11.7%, to be exact—there isn’t much available for large tenants. Therefore, the market for build-to-suits is there, maintained Michael Dorsey, principal of Coldwell Banker Commercial Alliance.

Of course, finding the land on which to develop these build-to-suits is still a concern in Orange County, as in many parts of Southern California, and at $350 per square foot to build, the prospect isn’t cheap. But with the abundance of capital looking for a home in the market, conditions are ideal for this type of development

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