Inland Empire retail should hold its ground in 2014

Don’t look for much construction, but deals are out there, and absorption and lease rates should do at least as well as they did last year, according to analysts

Despite an uncertain job market and a recession that won’t go away, 2014 should be a good year for retail in the Inland Empire.

Lease rates and absorption are expected to perform at least as well as they did last year, and vacancy rates are expected to keep dropping, according several brokers and retail analysts who are familiar with the two-county market.

But no one is predicting major retail development in Riverside and San Bernardino counties during the next 12 months, or a flood of new retailers entering the market, said Jerry Holdner, vice president of market research for Voit Real Estate Services.

One of the few major retail projects currently under construction in the Inland region is a Walmart supercenter in Perris, and it’s not likely that many similar projects will get started here soon, Holdner said.

Overall, only 236,000 square feet of retail space was under construction in the Inland Empire at the end of last year, according to Voit’s fourth quarter 2013 report on the Inland retail market.

To put those numbers in perspective, developers built more than four million square feet of retail space in 2007, the year the recession started. Still, the Inland retail market is headed in the right direction, and it probably won’t lose ground in 2014, Holdner said.

The region’s retail vacancy rate was 8.09 percent during the fourth quarter of last year, a respectable number that was four percentage points below the fourth quarter of 2012 and within one percentage point of the vacancy rate four years ago, according to the Voit report.

Because there is so much existing space to fill, the lack of new space coming on the market is allowing the vacancy rate to drop and absorption to rise, the report found.

“We’ve had six consecutive quarters of positive net absorption, which is good, especially in this economy,” Holdner said. “The market has done a lot better in the past year than some people predicted it would. We’re chugging along, but there’s a long way to go before the market is back.”

Two thousand and thirteen was a solid year, if not a spectacular one, for retail in the Inland Empire.

About 850,000 square feet of retail space was absorbed in the region during that time, and the average retail lease rate at the end of last year was $1.37 a square foot. That matched the third quarter’s lease rate and was a two cent drop year-to-year, according to Voit.

Maybe the biggest reason the Inland retail market improved in 2013 was jobs: the region’s unemployment rate was 9.4 percent at the end of the year, down from a revised 9.8 percent two months earlier. Though still high, the two-county region’s unemployment rate was well below the 11.2 percent that Voit forecast for it at the end of 2012.

“Retail always comes back to jobs,” said Holdner, who helped put together the Voit report. “More people were working last year, so more people had more disposable income. It’s really that simple.”

The Inland retail market should perform solidly in 2014, with small to medium-sized projects dominating the market, said Carol Plowman, senior vice president and a retail specialist with Lee & Associates Ontario.

Unfortunately, some well-known retailers, like Sears and JC Penney – the latter recently announced it will close its outlet store at Ontario Mills – may continue to lower their local profile during 2013, while other retailers are positioning themselves for when the market is truly back to normal, Plowman said.

“I think it’s going to be a good year,” said Plowman, who brokered many of the restaurants and specialty stores that surround Ontario Mills. “There are so many smaller deals out there. A lot of them are mom-and-pop operations, which usually means they’re going to struggle to make it, and a lot of them won’t make it. But at least my phone is ringing again.”

A still-shaky economy means the Inland Empire probably won’t attract a lot of anchor-based shopping centers this year, and there won’t be a lot of retail development, said Jeff Conover, senior managing director for Faris Lee Investments in Irvine.

Absorption is likely to stay at the same level as 2013, and lease rates will hover between $2.50 at $3.50 a square foot at shopping centers with major anchor tenants, and $1.50 to $2 a square foot at lesser properties, according to Conover.

If those predictions are correct, 2014 will look a lot like 2013, with a respectable number of transactions but few if any new properties coming on the market. “It’s all about disposable income and consumer confidence, like it always is with retail,” Conover said.

Most national retailers will remain cautious about coming into the Inland Empire until the region’s employment rate gets closer to six percent, said Mary Sullivan, president of Sullivan Consulting Services in Riverside.

“They’re being cautious, and I don’t see that changing this year,” Sullivan said. “They want to see more jobs and more income. We also need more rooftops. When housing picks up, retail will pick up.”

One bright spot on the horizon, not only for the Inland Empire but all of California, is Aldi’s, the German discount supermarket chain that announced in December that it will open 650 new stores in the United States during the next five years.

The company currently has about 1,300 U.S. stores, most of them in the Midwest or on the East Coast.

Aldi’s, which announced no specific store locations, also announced that will build a regional headquarters and a major warehouse-distribution operation in Moreno Valley, a sign that it wants to establish a clear presence in the Inland Empire.

“No one is talking about it, but what they are planning is a pretty major expansion,” said Brad Umansky, president of Progressive Retail Partners in Ontario, which specializes in retail projects. “They’re going to be setting up a lot of new locations when no one else is.”

While the Inland retail market isn’t poised for a great 2014, it would be a mistake to be too pessimistic about its long-term prospects, Umansky said.

The region has about 20 million square feet of available retail space for development, all of which will be available when the market starts to improve in a year or two, Umansky said.