While economic uncertainty still abounds, the Los Angeles County retail market remains on the road to recovery. Several significant leases were signed during 2013, representing an expansion of both value retailers and luxury brands. Also contributing to positive market momentum was the lack of massive closures by big box retailers, such as Borders and Blockbuster, which were seen in previous years.
Los Angeles also maintained its status as a primary market for investors. Cap rates trended in the low- to mid-5 percent range for core grocery/drugstore-anchored product and around the 6 percent range for power/promotional shopping centers. Investor demand was strong for high-profile and street-front retail in Hollywood and Beverly Hills, resulting in aggressive acquisition terms and cap rates falling into the four percent range and below.
Los Angeles’ retail market overall experienced moderate leasing activity in 2013. CoStar reported a positive net absorption of 850,112 square feet in the third quarter. However, one submarket that saw significant activity—retail and otherwise—was Downtown LA with the FIGat7th open-air shopping center leading the renaissance. In addition to CityTarget, which opened here in 2012, FIGat7th recently signed a 27,000-square-foot lease with Spanish clothier Zara for a flagship location and a 32,000-square-foot lease with fashion trendsetter H&M, also for a flagship store. Both are set to open in 2014.
Whole Foods Market is opening its first Downtown location as well. It has signed a 42,000-square-foot lease to anchor the 700-unit, luxury apartment complex to be developed at 770 Grand Ave.
Other significant LA leases completed in 2013 include:
- Nordstrom’s lease for 135,000 square feet at 210 Americana Way in Glendale
- Hobby Lobby’s execution of a 72,000-square-foot lease in a former OSH building in Burbank
- Nitori USA’s lease for 25,000 square feet along Hawthorne Boulevard in Torrance. Operating as Aki Home, it will be the home furnishing retailer’s first Los Angeles store
This retail investment market continues to see a lack of quality supply. This is contrasted with significant demand driven by the desire to acquire assets in core markets. Pricing has exceeded 2004-2007 levels, though private investors have been reluctant to sell due to the lack of suitable exchange properties and potential for significant capital gains. At the institutional level, REITs and pension funds have billions of dollars of equity earmarked for acquisitions. Starting in 2011 and trending into 2013, institutional groups were certainly selling more than they are today. This means that they have to start acquiring more before implementing additional dispositions in order to keep portfolios balanced.
One area that saw a substantial amount of activity was high-value real estate trading off-market — and for all cash — particularly in the West Hollywood and Beverly Hills submarkets.
Examples include:
- The Lladro building at 408 Beverly Drive that was acquired for $120 million by Chanel for eventual occupancy
- Emporio Armani at 9533 Brighton Way that traded for $40 million to a JV group that included Ashkenazy
- RREEF’s acquisition of two adjacent properties on Beverly Drive for a total of $35.5 million
Additionally, several significant new retail developments have been completed or broken ground, reflecting LA’s ongoing recovery. Among the most visible are:
- Gateway Towne Center in Compton. Phase II is expected to be complete this May. It should contain about 100,000 square feet and has secured well-known tenants like Marshalls, Petsmart, Anna’s Linens, Dollar Tree and ULTA.
- The Runway at Playa Vista. Paragon Group, Lincoln Properties and Phoenix Properties have broken ground on this 220,000-square-foot center to be anchored by Whole Foods, CVS and Cinemark.
- The Point, which is on the border of Manhattan Beach and El Segundo. The $80-million, 115,000-square-foot development will complement the existing and very successful Plaza El Segundo. It will include a variety of high-quality dining and lifestyle retail tenants.
Improving fundamentals like job growth and increased retail sales point toward continuing positive momentum in the retail real estate market in 2014. This will take the form of limited new construction and creative and flexible leasing strategies by owners of existing shopping centers. On the investment side, there will continue to be an imbalance of supply and demand in early 2014.
— By Kyle Miller, Corporate Managing Director, National Retail Services Group, Studley. This article originally appeared in the January 2014 issue of Western Real Estate Business magazine.