Sagiv Rosano, Rosano Partners
The retail market in Los Angeles is demonstrating exponential growth. Rents are going up, cap rates are going down and occupancy is soaring. Naturally, as lease prices rise, so do sale prices. As such, it is becoming increasingly difficult for investors to find opportunities where substantial rent growth is possible. Tenant competition is also fierce, and landlords are benefitting from extremely high demand throughout the market.
Competition Abounds
It’s only natural that retailers are competing over space as occupancy rises. One trend that has emerged in Los Angeles is competition among not only direct competitors, but indirect competitors as well. For example, a small grocer might compete with a Ross Dress 4 Less for the same location.
Fueling this competition is an increase in large national retailers seeking out smaller urban spaces in downtown areas. Target, for example, is opening a store in LA’s Koreatown on Vermont and 6th streets at the base of a high-rise apartment building.
When national soft goods chains open in urban hubs, there will be an evolution of retail surrounding those stores. Smaller discount stores and mom-and-pop retailers will likely suffer, which will lead to vacancies that tend to open the doors for new specialty eateries, coffee shops, etc., for urban consumers to enjoy.
Restaurant Wars
The restaurant sector is a particular hotbed of competition in the current Los Angeles market. Areas like Downtown and West Hollywood are demonstrating tremendous competition over restaurant space as many new and trendy concepts launch to meet consumer demand. This, naturally, which continues to drive rents up.
As restaurant owners prepare for economic factors like rising minimum wage, these professionals will be increasingly cautious about the rent they pay and the spaces they choose. For this reason, there is extremely strong competition for existing, built-out restaurants, which mitigate the risk of investing in a new restaurant build.
A Look Ahead
The retail market will likely continue to demonstrate strong performance in Los Angeles. However, it is important to note that rent growth will be forced to slow in the near future to avoid a squeezing out of quality tenants.
Investment is also likely to continue in the market, especially as foreign investors continue to see the U.S. as a safe haven for their capital.
Overall, the outlook for the Los Angeles retail market is optimistic. Rents are so strong that, even if they stabilize soon, landlords and investors should enjoy strong returns, while tenants benefit from continued growth in consumer demand and confidence.
By Sagiv Rosano, Founder and CEO, Rosano Partners. This story originally appeared in the October 2015 edition of Western Real Estate Business magazine.