What Type of Retail Space is Being Built in the Inland Empire?

In my most recent blog I provided an update on the 3rd quarter 2022 retail real estate market in SoCal’s Inland Empire.  In that blog I referenced the fact that there has only been about 750K square feet of new retail space delivered through the first three quarters of this year and only 850K in all of 2021. This got me wondering which users are expanding, what type of projects are being built, and were there any other insights I could surmise by looking more carefully at the data.

Here are my takeaways:

24 New Gas/Service Stations: In a world where many believe we will all be driving electric vehicles in the future, I was very surprised that there are a lot of entrepreneurs and corporate interests betting against that trend. Over 12% of the new buildings (24) constructed since the beginning of 2021 were gas stations. These were dominated by 7-Eleven and Circle K but there were also plenty of Arco AM/PM’s, Speedway, Mobil, and others built. Our understanding from speaking with developers and operators of these properties is that they see at least a 20-year runway on selling gas and therefore plenty of opportunity to get a return on their investment. Meanwhile, convenience store sales should be long lasting. And importantly, these operators are betting that if it turns out gas stations are not the best use of these properties in 20+ years, they generally occupy quality real estate so there should be a strong residual value in the future for these locations.

Starbucks & Dutch Bros. are Caffeinating the Inland Empire: There were at least 9 single tenant Starbucks and 5 single tenant Dutch Bros. constructed AND this doesn’t include the at least 7 newly built multi-tenant retail buildings which Starbucks and Dutch Bros. helped anchor. Furthermore, Starbucks has been aggressively taking second-generation fast food restaurant space and converting the space to the Starbucks brand which is NOT included in any of the figures within this blog.

Dollar Stores Continue to Thrive: It’s not a surprise that dollar stores continue to expand in the Inland Empire with Dollar General opening at least 9 new locations and Dollar Tree adding 3 stores. Most of these were in rural trade areas where a traditional grocery store was not located in close proximity to the site including in Blythe, Desert Hot Springs, Anza, and Bastow.

Chicken Remains Popular: Raising Cane’s and Chick Fil-A opened at least 4 locations each. Kentucky Fried Chicken opened at least 2 locations and El Pollo Loco opened as well.  In addition to the major chains, there has also been a number of regional and independent fast casual chicken operators opening as the consumer appetite for chicken seems to be insatiable.

Limited Neighborhood Centers: There have only been three new grocery anchored projects built in the last two years which has to be a record low.  Stater Bros. anchored the architecturally unique “New Haven Marketplace” in Ontario, Amazon Fresh is anchoring “The Bedford Marketplace” in Corona, and Stater Bros. anchors Lewis Retail Centers “The Marketplace at Calimesa” in, you guessed it, Calimesa.

Single Tenant Buildings Remain Very Popular: Single tenant development continues to be the preferred choice of developers as these are the easiest to exit as the single tenant investment sales market for national names remains strong.

This is a good (not perfect) representative list of the single tenant retail buildings that were constructed since January 1, 2021. They are listed by number of units in alphabetical order:  Dollar General (9), Starbucks (9), Dutch Bros.(5), Chick Fil-A (4), Raising Cane’s (4), The Habit Burger (4), Quick Quack (4), AutoZone (3), Dollar Tree (3), Farmer Boys (3), O’Reilly Auto Parts (3), Burger King (2), Grocery Outlet (2), Jack in the Box (2), Kentucky Fried Chicken (2), Taco Bell (2), Wendy’s (2) and one each of Aldi, America’s Tire, Arby’s, Carl’s Jr., El Pollo Loco, In-N-Out Burger, McDonald’s, Panda Express, Planet Fitness and Sprouts.

Costco Was the Largest New Building: At 151,340 SF, the new Costco location in Murrieta was by far the largest new building constructed in the market. Walmart came in 2nd with their 127,700 SF store in Lake Elsinore.

South Riverside County Dominated: The communities of Lake Elsinore, Menifee, Murrieta, Winchester, and Temecula that comprise “South Riverside County” dominated the new construction with 38% of the new development. Besides the dominance of these trade areas, the balance of the development was well diversified across San Bernardino and Riverside Counties.

Ground up development is likely to remain fairly soft for the foreseeable future. There is just too much risk involved in new construction. The uncertainty over entitlement timing and expense, construction costs, financing, and exit cap rates, makes development very challenging today. As a result, we believe that although there will continue to be select development as outlined above, the focus of many will be redeveloping and re-tenanting second generation space for at least the next 12 to 24 months.

At Progressive Real Estate Partners we pride ourselves on our deep knowledge of the Inland Empire marketplace and I invite you to reach out any time at brad@progressiverep.com with any questions regarding the market fundamentals and the dynamics at play.