As Los Angeles Economy Improves – Retail Follows

Los Angeles employers added more positions in the second quarter than during any other three-month period over the last decade — an indication that the county’s economic recovery could be gaining traction, which will support retailers, according to the latest research from national real estate investment services firm Marcus & Milichap. Nonetheless, the return to prerecession retail operations will requires several quarters of healthy job growth before improvements in vacancy and rents reflect the stronger economy. As a result, tenants still hold the upper hand when negotiating new leases in most areas, especially for dark in-line space, where there are far more vacancies than interested retailers. 

The Westside Cities remain an exception due to the consistent demand for space near the coast. South Bay/Long Beach also has a neutral leasing situation as the limited amount of new demand is directed entirely at existing centers. Overall, however, inland operators will remain handcuffed in raising rents, and will instead focus on generating revenue through occupancy gains.

While the large inventory of available retail properties in Los Angeles generally provides investors with several options to acquire assets, the most active buyers are having trouble finding listings that suit their strategies. Many multi-tenant investors are scouring the county for value-add deals in B+ or better locations, but few banks have been willing to foreclose and divest these assets. Instead, lenders will extend loans until a more robust recovery in operations emerges, which could facilitate more refinancing opportunities or elevate the value of the asset before disposition. Some stabilized properties are changing hands at cap rates near 7 percent for anchored product and 100 basis points higher for strip centers. Single-tenant buildings are also changing hands, though the number of prime, long-lease assets available has been limited by the slowdown in construction. When available, a triple-net deal with a corporate-backed lease will trade at cap rates starting in the high-5 percent range, and first-year returns will climb up to 8 percent for local retailers with a proven track record.

Here is a snapshot of Marcus & Millichap’s latest findings on the retail market for LA County:

Employment: Employers will add 52,000 jobs across Los Angeles County this year, expanding payrolls by 1.4 percent. More than 20,000 of those jobs will come in the typically high-paying professional and business services sector, which will bode well for local retailers.

Construction: Developers will add nearly 950k sf of retail space to inventory this year, expanding countywide stock by 0.4 percent. Last year, builders delivered 690k sf in the market.

Vacancy: The pace of store openings will improve in the second half as major retailers position for the holiday season. As a result, vacancy will finish the year at 6.2 percent, down 10 basis points from year-end 2011.

Rents: As owners in desirable areas push rents higher, asking rents will rise 0.8 percent to $28.29 per square foot in 2012, while effective rents climb 1.2 percent to $24.62 per square foot. Last year, asking and effective rents each advanced 0.6 percent.

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