WESTERN SNAPSHOT, APRIL 2007

Palm Springs, California, Retail Market

Kassinger

Population, population, population. This is the driving force in Southern California’s Coachella Valley, a retail market that totals nine main cities, but which revolves around three distinct hubs: Palm Springs, Palm Desert and La Quinta.

According to the Coachella Valley Economic Partnership, the valley’s low cost of living, staggering 350 days of sunshine per year and rapidly growing office and industrial base are at the heart of a population boom that between 1990 and 2004 posted 59 percent growth. Between 2004 and 2005, the valley grew an additional 6.34 percent or almost double the 3.82 percent growth rate of Riverside County, which is the second fastest growing county in the country.

Along with this growth, taxable sales in the Coachella Valley grew by more than $1 billion and are expected to continue their sharp rise during the next 15 years when the current population of 410,000 will grow by an expected 212,000 additional permanent residents. This translates into 75,750 new households and 5,050 new homes that will need to be built annually to keep up with demand.

Historically, the greatest portion of local homebuyers — or approximately 80 percent —have come from neighboring Los Angeles and Orange counties. Of late, that demographic has expanded somewhat, primarily among those from the northern parts of the country and Canada. Many of these new residents are also investor-level individuals that are now looking to invest in local real estate, particularly triple-net retail property. Unfortunately, they are facing an extremely limited for-sale inventory, as those who already own retail here are holding on to reap the rewards of market growth. When retail properties do trade, they are doing so at almost zero cap rates and at prices that range anywhere from $350 to $500 per square foot.

In Palm Springs, which is dominated by smaller independent retail stores, existing product is older and renting for $1.25 to $3.50 per square foot, depending on the age of construction and proximity to downtown. Vacancy is less than 5 percent. While most owners in Palm Springs are holding on for urban infill potential, a few properties have traded recently. One of these is a downtown property at the corner of Palm Canyon Drive and Alejo, for which Rael Development paid $4 million per acre to reposition an old retail project into a mixed-use environment with 30,000 square feet of retail and 120 gallery lots. Within 12 months, Palm Springs-based Wessman Development will begin 250,000 square feet of retail space and as many as 600 residential condominiums, also downtown. Named Museum Market Plaza, the development will sit at the site of the nearly vacant Desert Fashion Plaza once that project is torn down.

While Palm Springs’ renaissance is being driven by mixed-use potential and the anticipated influx of higher-end boutique retailers, La Quinta is seeing the greatest growth on the big box front. Located east of Palm Springs, La Quinta has more available land and an explosion of new homes that range from senior communities to luxury properties. The big box cast of characters assembled along Highway 111 includes Circuit City, The Home Depot, Kohl’s, Lowe’s Home Improvement Warehouse, Office Depot, OfficeMax, Wal-Mart Supercenter and Target. Vacancy rates are next to nothing, and rents range from $1.50 to $2.50 per square foot.

Neighboring Palm Desert represents similar growth in the big box sector, but is supplemented with the area’s best collection of high-end shopping that includes Anne Taylor, Brooks Brothers, Coach, Cole Haan, Escada, Polo, Saks Fifth Avenue, Tiffany & Co., Tommy Bahama and Williams Sonoma, all of which are located along the El Paseo artery. Rents in Palm Desert are correspondingly higher, ranging from $2.50 to $4 per square foot and with vacancy also at almost zero.

As demand in each of these markets continues, however, land supplies decrease, as does the ability to meet demand from the estimated 53 new residents that enter the market each day. Across the board, this creates new barriers to entry for construction, operations, investment and particularly among the individual and small corporate investors, who drive the Coachella Valley retail market with deals that typically fall between $3 million and $8 million.

Looking forward, these smaller investors will need to consider the next wave of opportunity: finding old and tired but well-located strip centers in Palm Springs that can be torn down and replaced or reconfigured with new retail development. There is also little doubt that institutional-level players will become a greater force as more and more big box properties come online in markets like Palm Desert and La Quinta. As this occurs, the Coachella Valley will no doubt continue its maturation into a newer and better version of itself and a retail environment that tenants and investors alike will stand in line to join.

Michael Kassinger is a senior vice president for Sperry Van Ness in Palm Springs.


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