Los Angeles and Orange County, CA Retail Market Report

Orange County Market Overview

The retail market in Orange County is characterized by a strong consumer base, a thriving tourism industry, and a low unemployment rate, which has driven robust demand for regional malls, neighborhood restaurants, and shopping centers. The availability of retail space has reached a decade-low, leading to limited absorption and increased occupancy levels driven by tenant expansions. The redevelopment of vacant retail spaces into mixed-use projects has led to a unique situation where market availability subverts vacancy. Discount retailers and experiential tenants, particularly in the fitness industry, are in high demand. Landlords hold negotiating leverage, resulting in an increase in rents over the last 12 months. Although sales activity is slightly decelerating due to rising capital costs, the strong demand drivers and consumer base in Orange County provide investors with confidence in improved operating returns and asset appreciation over time.

Highlights

• The vacancy rate has decreased in the past year to 4.3%.
• Orange County benefits from favorable demographics, including a slightly older population and a median household income of around $110,000, leading to strong capital flows to local retailers.
• Orange County completed $872 million in retail sales volume in the past 12 months.
• A notable trend in the market is the redevelopment of obsolete retail spaces into mixed-use projects, incorporating multifamily space.

Rents | Vacancy | Construction

Some of the largest developments in the pipeline are auto dealerships, including a house of imports in Buena Park and an Audi Dealership in Placenta.

Year-over-year rent growth in Orange County’s retail sector is 4.6%, surpassing the five-year annualized average of 3.1%. Orange County’s average retail rents stand at $37 per square foot, ranking among the highest in the country, compared to the current national average of $24.20. This is due to the presence of retail sites that cater to a high-income demographic. As of Q2 2023, the vacancy rate is 4.3% There are currently 6.1 million square feet of retail space available, accounting for only 4.3% of existing inventory. Furthermore, Orange County currently has 112,478 square feet under construction, accounting for 0.1% of existing inventory. Over the past five years, retail inventory in Orange County has decreased by a net of -330,000 square feet as redevelopment projects have repurposed space for higher and better uses.

Sales

Orange County, By the Numbers in the Last 12 Months

• Square Feet Delivered: 148K
• Properties Under Construction: 12
• Rent Growth: 4.6%
• Sales Volume: $872M
• Vacancy Rate: 4.3%

Rising interest rates have led to moderated transaction volume in Orange County’s retail market, with a 12-month sales volume of $872 million. Private capital drives the investment market in Orange County, while national institutional, private equity, and REIT entities typically account for around 25% of buying capital. Furthermore, average transaction pricing in 2023 has decreased to $346 per square foot, down from a peak of $466 reached in 2022. Cap rates in Orange County currently average 5.3%, compared to an all-time low of 4.7% in 2022, and are expected to rise further in the coming year.

Los Angeles Market Overview

The retail market in Los Angeles offers a dynamic and diverse landscape shaped by the city’s distinctive demographics, entrepreneurial spirit, creative economy, and popular tourist attractions. While availability has risen overall, neighborhood centers have seen strong demand due to a preference for convenience. This attracts a diverse range of tenants, such as grocers. On the other hand, malls and power centers are experiencing mounting availabilities, influenced by changing work patterns and reduced tourism levels. Construction activity has been relatively low, with recent projects focusing on auto dealerships and small retail pads. Despite challenges, Los Angeles remains a liquid market supported by its large resident population, daily commuters, and annual visitors, with trends reflecting evolving consumer preferences, economic shifts, and the ongoing recovery from recent disruptions.

Highlights

• Los Angeles currently has one of the highest rents in the nation.
• Trailing 12-month rent growth stands at 1.3%.
• Los Angeles completed $4.9 billion in retail sales volume in the past 12 months.
• Amazon has a significant presence in the Los Angeles retail market, with multiple locations opened in 2021 and 2022.

Rents | Vacancy | Construction

L.A. has one of the highest rents in the nation, with average asking rates of $36 per square foot, nearly 50% higher than the national average of $24 per square foot.

Over the past 12 months, average asking rates in Los Angeles have increased by 1.3%, while national index markets experienced a higher growth of 3.5%. There is a significant variation in average asking rates within Greater Los Angeles. Rents in Beverly Hills are four times higher than in areas like the Antelope Valley, Southeast Los Angeles, and parts of the San Gabriel Valley. The vacancy rate in the Los Angeles retail market has increased by 0.2% in the past year to 5.3% as of Q2 2023. The construction pipeline for retail projects has been limited for over a decade, with only 1.8 million square feet currently under construction, representing a small fraction of the existing retail inventory in the metro area. The largest ongoing project is the Los Angeles Premium Outlets in Carson, covering 400,000 square feet.

Sales

Los Angeles, By the Numbers in the Last 12 Months

• Square Feet Delivered: 840K
• Properties Under Construction: 64
• Rent Growth: 1.3%
• Sales Volume: $4.9B
• Vacancy Rate: 5.3%

Sales volume of the Los Angeles retail market for the past 12 months totaled $4.9 billion as of Q2 2023. Price appreciation for retail properties in Los Angeles has grown at an annual rate of 3.3% over the past five years, reaching $420 per square foot. However, market conditions, including higher interest rates, are expected to slow down price appreciation. A recent notable transaction includes the $43 million sale of a 14,100-square-foot store in Beverly Hills in March 2023.

Retail properties continue to face long-term challenges due to the increasing preference for online shopping over traditional brick-and-mortar stores.