Los Angeles Commercial Retail Market Report as of October 1, 2023

[Manuel Angeles]

Greetings,

Here is an update on the current Commercial Retail Market in Los Angeles County, CA:

The Los Angeles retail market continues to grapple with negative demand and expanding vacancy in response to five consecutive years of population losses. Most recently, absorption has declined by 1.1 million SF over the past 12 months.

While demand on the whole has been negative, shifts in post-pandemic shopping behavior has benefitted neighborhood centers. Availabilities in neighborhood centers, which have benefitted from strong demand from a diverse array of tenants including grocers, is declining. Consumer foot traffic has shown a clear preference for convenient centers with easy access and multiple shopping methods. Fitness companies, such as Planet Fitness and Gold's Gym, as well as boutique gyms, have been actively leasing space in neighborhood centers this year. Tight availabilities and growing demand for space have resulted in stronger rent growth for neighborhood centers relative to the wider retail market. This outcome is mirrored in suburban submarkets, such as Mid-Cities, Antelope Valley, and those in the San Gabriel Valley, where neighborhood centers make up a larger proportion of the retail inventory.

Conversely, availabilities are growing in malls and power centers. Submarkets in the West, where tech and financial firms are clustered, are experiencing softer demand as workers are spending fewer days near their offices. Overnight travelers also help drive demand to these submarkets, such as the Downtown L.A. and Santa Monica Submarkets. However, tourism remains below pre-pandemic levels due to a slower recovery from international and business travel.

The challenges in attracting tenants have caused rent growth to flatten. Rents grew by 0.6% over the past year and have underperformed the national index since late 2019. In contrast, markets around the nation with stronger population growth are experiencing stronger rent growth.

Overall construction levels have been low for over a decade. Recent construction comprises auto dealerships and small retail pads, usually with drive-thru capabilities. Net deliveries total 740,000 SF over the past 12 months, growing existing inventory by less than 0.1%. Apart from the Macerich Company's 400,000 SF Carson Outlets project, the few retail developments in the pipeline are small shopping centers or freestanding buildings, as well as auto dealerships.

While Los Angeles is generally a very liquid market, a wider bid-ask spread, and falling valuations due to rising interest rates are impacting the market. However, these factors have been masked by elevated sales volume in 23Q1, which was largely driven by sales of properties within city limits as a hefty transfer tax was imposed at the start of April for properties within the city of Los Angeles. Many buyers and sellers came together to close deals prior to the deadline to avoid paying additional taxes. Since then, fewer properties have traded, reflecting the trends observed in the national retail market.

Here are several graphs illustrating the current commercial retail market in Los Angeles county:

Access the full Los Angeles county commercial retail market report here: https://d2saw6je89goi1.cloudfront.net/uploads/digital_asset/file/1170820/Los_Angeles_-_CA-Retail-Capital_Market-2023-10-02_a_compressed.pdf

Data includes: Sale price per unit distribution, cap rate distribution, cumulative sales volume by year, months to sale, recent significant sales, vacancy rates, market rent per square foot, construction deliveries/demolitions, economy, job growth. population growth, and Los Angeles county sub-market activity.