Southern California – Retail Market Report

Los Angeles Market Overview

Los Angeles is home to some of the nation’s most expensive retail real estate. With world-renowned areas including Beverly Hills, Rodeo Drive, Abbot Kinney, Santa Monica, and West Hollywood, these high-street retail districts surpass the highest rental rates in the market. Although high in population, Los Angeles still has a relatively lower retail stock per capita compared to other large cities, with about 20% less retail square footage than the Chicago metro. While outdated retail needs to be filtered out of the local market, properties are being coveted for a variety of conversion options. Fitness centers and grocery stores have been important drivers, taking large spaces in area shopping centers as well as mixed-use developments. Rents saw modest losses in 2020, but gains have accelerated since the beginning of last year and are up 3.8% from a year ago.

Vacancy & Leasing

Recent net absorption by submarket shows that some areas have fared better than others. The Mid-Cities and Suburban Long Beach have seen positive net absorption while the Torrance and Western San Gabriel Valley (SGV) submarkets have seen among the most negative. Since the onset of the pandemic, gross leasing has steadily increased allowing vacancy to come down slightly to 5.2%. Amazon continues to be a key player in L.A.’s retail market, announced that it would open a 30,000 square foot tech-driven apparel store in the Americana at Brand mall. Other large leases have been seen by grocers and fitness centers.

Rent & Sale Volume

The average modeled price per square foot currently stands at $410, well above the national retail average of $230. Average market cap rates, presently 5.3%, are far below the national average of 6.8%. Average market pricing flatlined through much of 2020 and 2021, although recent quarters have seen modest asset price growth. Opportunistic buyers see a positive outlook in acquiring assets on sites ripe for redevelopment.

Retail rents are among the highest in the nation, with average asking rates of $35.00 per square foot, which are 50% higher than the national average of $23.00. All segments of retail subtypes saw losses in 2020, but strip and neighborhood center rates declined more modestly relative to the power centers, malls, and general retail properties. Gains will likely be stronger during the near to midterm as the market is anticipated to continue to see occupancy improve through 2022 and early 2023.

San Fernando Valley Market Overview

The San Fernando Valley (SFV) is a very liquid investment market, characterized by heavy trading. At $369/SF, market pricing is considerably lower than the region’s average pricing. Meanwhile, retail vacancies were roughly in line with the five-year average during 22Q2, and rents have surged in the past 12 months, growing by 5.4% year over year.

Rent & Vacancy

Asking rents in the SFV run for about $29.00 per square foot triple net on average, a moderate discount to the metro average of about $35.00. Rents posted an astounding gain of 5.4% over the past 12 months, bolstering a submarket that experienced average annualized rent growth of 2.9% over the past three years. Over a longer window, retail rent growth in both the SFV Submarket and the Los Angeles metro at large has been convincingly strong, retail rents in the SFV are 32.2% higher than they were a decade ago, essentially matching the 10-year metro-wide performance.

Orange County Market Overview

Orange County is currently at its highest level of heightened inflation in the last 40 years. Retailers are having trouble finding enough workers to fill open positions, and local businesses are offering referral fees, bonuses, and higher pay to entice recruitment. The 4.3% vacancy rate is still elevated relative to what it was ahead of the pandemic, and leasing activity has improved, although tenants have shown more restraint in their commitments given that the average lease size has fallen by about 15%.

Vacancy & Leasing

The overall vacancy rate is 4.3%, compared to 3.8% three years ago. The pace of store reversals has slowed notably since the initial wave in 2020. After occupancy fell by roughly 1 million square feet in 2020, net absorption has rebounded with 260,000 square feet absorbed. Leasing activity since 2021 has improved after the county shutdown in 2020, but the level is still roughly 15% lower than the average leasing volume in the years ahead of the pandemic. Most large new leases have involved essential businesses like grocery stores and discount stores. At the start of 22Q2, officials in Laguna Hills approved plans for a $130 million mixed-use redevelopment of the aging Laguna Hills Mall into a two-phase project called Village of Laguna Hills. It would include approximately 1,500 apartments, up to 250,000 square feet of retail, 465,000 square feet of offices, and a hotel.

Construction

Construction activity has slowed recently in Orange County, with 110,000 square feet of retail space, or 0.1% of existing inventory, underway. The five-year average for under-construction inventory is 200,000 square feet. Some of the largest developments are auto dealerships spread across the county, including a House of Imports in Buena Park and an Audi dealership in Placentia. Given that those properties are pre-leased, and new supply is not expected to apply upward pressure to vacancy or rent growth in the near term of the forecast. Recent deliveries have been focused on freestanding single-tenanted assets with credit tenants.

San Diego Market Overview

Losses in occupancy have largely subsided since the pandemic, and net absorption remained positive in the San Diego market. The uptick in leasing activity has spurred rent growth wherein market-wide rents have fully recovered and are growing at historically high levels. Currently, the pipeline is filled primarily with the retail portion of the Campus at Horton in Downtown, a 300,000-square-foot lifestyle center. The past year has seen several of the biggest retail sales in the past decade, from malls and vacant anchor blocks to grocery stores and bowling alleys.

Rent

Annual rent growth has recovered, and retail rents have grown 5.8% year over year, compared to the long-term average of 2.6%, and it is trending at an all-time high. Rents in general retail space have grown by 6.0% year over year, while rents in strip centers are up 5.8%. Conversely, rent losses and weaker performance in San Diego were most heavily concentrated in areas with high household incomes, large malls, and more expensive rents such as UTC, Downtown, Carmel Mountain Ranch, and Mission Valley. However, rent growth has turned the corner and accelerated in those submarkets as well since the start of 2022.

Sales

San Diego retail properties, on average, still offer investors a higher yield compared with other coastal California markets. Buyers have received an average discount of 6% off the asking price over the past year. Net-leased investments could see less demand among levered buyers in a high-interest rate environment given the typical long-term, single-tenant occupancy with low, fixed, escalations not attached to CPI. Cash buyers are likely to continue being attracted to those investments. Recent deals point to the possibility of retail space being repositioned to add housing or include developable land that could accommodate housing.