Posted 7 months ago

Los Angeles Commercial Retail Market Report as of January 15, 2024

Greetings,

Here is an update on the current Commercial Retail Real Estate Market in Los Angeles County:

Transaction activity continues to moderate as investors adjust to the effects of higher interest rates. Sales volume totaled $3.3 billion in 2023, although much of the activity from the first quarter came from buyers and sellers who were looking to avoid the ULA transfer tax increase in the City of Los Angeles. Auto dealerships and owner/user sales account for a large proportion of trades in recent months, such as Brandon Steven Motors' acquisition of the Win Chevrolet dealership in Carson for $47 million in October.

While price discovery is underway, only a few properties have traded for less than their acquisition price due to their long-term appreciation. The exceptions have generally been in opportunistic or value-add investments below $5 million, where plans changed and investors mitigated losses.

Malls, which were highly sought after by investors in 2022, also had valuations decline in 2023. In September, Centennial Real Estate acquired the 1.2 million-SF Valencia Town Center from Unibail-Rodamco-Westfield for $199 million, or $172/SF, including the debt assumption of $195 million. The seller had stopped making loan payments earlier in the year. Another mall trade with a valuation loss involves the 248,900-SF HHLA shopping center, which traded in March, just before the implementation of the ULA transfer tax. Cannon Commercial acquired the asset for $80 million ($321/SF) from Torchlight Investors at an 8% cap rate. The seller originally acquired the asset as a main equity partner of the Laurus Corporation in June 2015 for $111 million. Despite renovations in 2017, the asset was 90% leased at the time of sale in March 2023, whereas it was 96.8% leased during the previous sale.

Pricing on the top end of the market can be astronomical and can often diverge from aggregate economic and capital market trends due to their scarcity. It became common in recent years for some properties to double in price over short periods. But at least one recent trade shows that there are limitations to growth. In March 2023, LVMH acquired a 14,100-SF store located in Beverly Hills for $43 million ($3,040/SF). The seller acquired the property in July 2015 for $40 million, whereas a previous sale from December 2013 valued the property at $22 million.

The market price, which represents the average estimated price of all retail space in the market, has been flat over the past 12 months but has grown by an average annual rate of 3.2% over the past five years, reaching $430/SF. Over the same period, price appreciation has been strongest in submarkets across the San Fernando Valley, Antelope Valley, and Inglewood/South LA. In contrast, some of the most expensive submarkets, such as Beverly Hills, Century City, and Hollywood, have experienced lower price appreciation. However, the effects of higher interest rates are expected to place upward pressure on cap rates in the Base Case scenario, causing the market price to decline over the next six quarters.

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