Just don’t look for anything spectacular. Lease and vacancy rates will improve only slightly, and very little construction will happen. The market is treading water, waiting for the full economic recovery believed to be a year away.
The Inland Empire retail market, which was stopped cold when the Great Recession hit in 2008, maintained a slow climb back to respectability in 2014.
As 2015 gets underway, some local retail brokers say they expect more of the same this year: nothing extraordinary, but still a solid 12 months that will see lease rates rise and vacancy rates fall -modestly – and a few new players entering the market.
There will also be some construction, although it will be almost exclusively build-to-suit, not speculative.
Some brokers say they’re waiting for 2016, when the economy is expected to make a full recovery and the Inland retail market should follow its lead.
“I see an uptick in activity happening this year, but I think next year is when the market will really break out,” said Carol Plowman, senior vice president with Lee & Associates Ontario. “As of right now, you have some fast-food restaurants coming into the [Inland Empire], and some more Starbucks opening up, but that’s about it. I don’t see a lot happening in the market until 2016, maybe even 2017.”
Plowman, who has focused on projects around the Mills since the regional shopping mall opened in 1996, believes the “big box” retailers will continue to look for medium to smaller spaces in 2015. That downsizing trend started several years ago and has been prominent in the Inland Empire.
“Best Buy is doing some of that, and so are a few other larger retailers,” Plowman said “It’s another way they can reposition themselves in the market.”
Everyone seems to agree on one thing: not much retail space will be built in Riverside and San Bernardino counties this year. As 2014 came to a close, a little less than 300,000 square feet of retail space was under construction in the two-county region, and most of that was for shopping centers on the east end, according to Voit Real Estate Services Ontario’s Fourth Quarter Report on the region.
To put that number in perspective, more than four million square feet of retail space went online in Riverside and San Bernardino counties in 2007, the year before the recession hit, according to Voit.
Vacancy dropped in the retail sector last year, though only slightly: 7.75 percent at the end of 2014, down from 7.9 percent at the end of 2013. The region did post negative net absorption in the fourth quarter – minus 166,868 square feet – but it has posted 3.1 million square feet of positive net absorption since the third quarter of 2011.
Average lease rates were virtually unchanged: $1.36 a square foot, down one cent from the fourth quarter of 2013, Voit found.
Those numbers reflect anything but a booming retail market, but at least they’re positive, and that bodes well for the region during the first few months of 2015, said Jerry Holdner Jr., vice president of market for Voit.
The Inland Empire is expected to add about 27,500 jobs this year, with the bulk of those happening in leisure, hospitality, construction, transportation and logistics, according to Voit.
“The numbers have been positive for the last couple of years, and we expect that to continue this year,” said Holdner, who helped compile Voit’s Inland fourth quarter report, which included data for the entire year. “We were a little surprised by the numbers for the end of the year. The retail market is actually doing better than the office market, which is good.
“Right now I would call it a nice, even recovery,” Holdner added. “We’re adding jobs, and retail always seems get its share of new jobs.”
Retail leases should increase and vacancy should decline this year, although any changes in those categories are expected to be small. Vacancy is expected to be down to about seven percent by the end of the year, down from its current mark of 7.75 percent.
“That would be a good drop, but I wouldn’t call it historic,” Holdner said. “The retail market is like the entire economy. It’s coming back, but it’s coming back slowly.”
Plowman believes the Inland region’s retail vacancy is closer to seven percent, and predicted that it could drop as much as half a percentage point by the end of the year. That’s because a number of fast-food restaurants – including Smashburger, The Habit, Coffee Bean & Tea Leaf, Peet’s Coffee & Tea and Mod Pizza – have all announced plans to either enter or expand in the Inland region this year.
“They all have the Inland Empire on their radar, and that will help our vacancy rate,” Plowman said. “But they might have a hard time finding a good location. A lot of the A-plus locations for fast food are taken.”
Any retailer who ultimately wants to locate in the two-county region should do so now, while good space is available at a reasonable price, said Michelle Schierberl, senior vice president with Colliers International.
“Lease rates are low now, but they aren’t going to be low forever,” said Schierberl, who has brokered multiple retail deals in the two-county region. “They should be taking advantage of them while they can.”
Restoring the housing market is the key to getting the retail market strong again, not only in the Inland Empire but in every submarket, according to Schierberl.
The government needs to make it easier for people to get a home loan.” Schierberl said. “If they do that, more houses get built and then the retail market comes back. Retail always follows housing.”
Some retailers are struggling with consumers doing more of their shopping online, and the lack of activity in the market – not as much construction being one example – is beginning to reflect that.
“I don’t think [online shopping] is that hard to compete with,” Schierberl said. “The main thing you have to do is step up your game on customer service, but some retailers are still struggling with that.”