WESTERN SNAPSHOT, JANUARY 2009

Orange County, California, Retail Market

With the grim but true forecast that the holiday season was slated to be one of the worst for retailers in decades, the years of exorbitant consumer spending are over for now. Retailers, whose holiday sales seasons are vital for their survival, are already bracing for major disappointment this year.

The credit crisis is having a significant effect on more and more people. It was once said that money is the “mother’s milk of politics.” Well, money is also the mother’s milk of retail. Without money or at least the feeling of having money, retailing dries up. Yes, the basics continue — that is why Wal-Mart is doing well — but that extra Mercedes, Tiffany’s bobble or cashmere scarf are deferred desires. Forget those things — people are not even buying new sheets and pillow cases (note the failure of Linens ‘n Things).

Orange County’s retail sector has continued to spiral downward, just like the rest of the country. Vacancy rates have risen for the second consecutive quarter, and new development has dropped to the lowest level in years. It seems as though everyone in the market place is looking for answers. There are no answers yet, thus the confusion has caused a slowdown in all transactions country-wide, state-wide, county-wide, city-wide and street-wide.

The group of national and regional tenants filing for Chapter 11 seems to be growing daily, and adds to the growing doubt that this will be over sooner than later. In fact, Chapter 11 is the good news because Chapter 7 is the more likely outcome. New to the group of retailers filing is Circuit City, which announced in November that it will be restructuring and downsizing 155 of its national stores, a small portion of which are located in Orange County. This has been fueled by Orange County as a whole being drastically affected by the mortgage crisis, which hit consumer confidence right in the gut.

Brad Anderson, CEO of Best Buy stated in November, “Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we’ve ever seen.”

A number of national credit tenants, as well as regional tenants, are either closing stores or canceling expansion plans for 2009. A lot of landlords have been left at the altar literally days before a lease was to be signed after months of negotiations. The projections by experts for lackluster sales in fourth quarter 2008 and most of 2009 have put fear in even established retail tenants such as Macy’s and Bloomingdales. Both stores have seen a 6 percent drop in sales at their 12 Orange County locations.

These issues will spill into bigger problems for institutional owners that have big box vacancies on their hands. Most are doing whatever they can just to keep their existing tenants. Owners are stretching out payments and even restructuring leases from Laguna Beach to Fullerton to prolong the looming vacancies from happening in the short term. Rental rates have sustained their levels on paper, but as soon as the information from the past few months is collected it will show a significant drop. General Growth Properties is currently considering bankruptcy because of the near billion dollars in loans coming due and their stock price rocketing downward to a sub-$1 level. General Growth Properties is the second largest owner operator of malls in the country — just behind Simon Property Group — and owns and operates a number of malls in the OC.

On the positive side there is always opportunity in a down market and especially in Orange County. Developers are looking for new ways to sell or restructure their projects, through joint ventures or getting creative with their financing. Creativity is the only ability many developers have to see their projects through and provide some return to their investors. On the opposite side, for tenants, this is a wonderful market to make a deal.

David Aschkenasy is senior director of the Retail Services Group at Charles Dunn Company and Kevin Cox is an associate.

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