The Los Angeles retail market is continuing to make a comeback after challenges caused by the disruption of the COVID-19 pandemic. According to a Los Angeles third quarter market report from Kidder Mathews, the market is seeing signs of positive growth, as vacancy rates in the region remain stable and rental rates are picking up.
“As the market began to reopen a bit and consumers were shopping in person more consistently, foot traffic increased, and the retail market saw a steady increase in demand. This has equated to positive net absorption, especially in the third quarter. As a result, there has been a notable uptick in asking rents with the overall average asking around $2.80 per square foot per month, growing by roughly two percent year-over-year,” said Gary Bargona, who heads research at Kidder Mathews.
While the vacancy rate remained flat year-over-year at five percent, the market still showed some signs of life, with rising rental rates and positive net absorption. According to the report, rental rates increased by 2.10 percent year-over-year from $2.74 to $2.80. The third quarter also recorded positive net absorption of more than 1.2 million square feet. In comparison, Kidder Mathews reported a positive net absorption of 799,900 square feet during the same time last year.
Despite this, there are still many challenges facing retail assets. In particular, supply chain backups are expected to continue causing issues across the U.S., especially as demand increases throughout the holiday season. According to Bargona, these issues are unprecedented and could be resolved in the next four to eight months, but could proceed as long as eighteen months.
According to Kidder Mathews, the market is continuing to see improvements. However, some assets are outperforming others. Retail properties offering necessary or important services as well as higher quality experiences are continuing to draw in investors and consumers alike, while standard strip malls are becoming less desirable. Kidder Mathews suggests many retailers will have to develop high quality shopping centers as a way to draw more consumers into brick-and-mortar storefronts.
This was shown in the report as many investors and tenants looked to occupy or purchase space at high end shopping centers in highly sought after locations. For instance, Charing Cross Partners purchased a 111,624 square-foot shopping center at 5040 San Fernando Road in Glendale for $61.75 million. The property is fully leased to Home Depot. A well-known art gallery in the heart of Hollywood also was sold to RedCar Properties for $29.5 million. The property is located at 800-812 N. Broadway and totals 79,500 square feet. An additional shopping center in downtown Long Beach was sold to Safco Capital Corporation for $15.15 million. Located at 3900 E Ocean Boulevard, the property includes 19,064 square feet of rentable space and is currently leased to Vons.
In addition, this trend was maintained through various lease transactions that occurred over the course of the third quarter. In one transaction, LA Fitness leased 33,987 square feet in Downtown Long Beach. Emerald Health Center as well as children’s clothing retailer Kid’s Empire also leased 12,000 square feet and 13,000 square feet, respectively, in the Eastern San Gabriel Valley submarket of Los Angeles.
“The most successful retailers are providing multiple purchasing options for consumers while still providing genuine and high-quality customer experiences. Additionally, larger brick and mortar stores have added curbside pick up to the list, another convenient option for customers who do not want to pay delivery fees or wait on items. Additionally, some larger stores started selling and repurposing some of their properties into last mile logistic facilities,” Bargona said.
In fact, the development of additional retail assets is continuing in Los Angeles, with new construction in the third quarter totaling 75,363 square feet. An additional 1.7 million square feet also remains under construction. Approximately 320,000 square feet of this is from the anticipated retail development at Kroenke Group’s master planned community, Hollywood Park. The Grand, a 176,000 square-foot retail space, is also expected to be delivered to downtown Los Angeles in the first quarter of 2022.
While brick-and-mortar retail development is not going away, Kidder Mathews suggests it will continue to evolve as consumer habits change. Offering more convenient services and high quality shopping experiences is likely going to be the way forward for much of Los Angeles’ retail space.
“Retail will continue to evolve to provide conveniences to the consumer and what will become the new normal,” Bargona said. “…Some outdated, closed, and underperforming retail buildings could provide conversion opportunities for last mile delivery locations (to speed up delivery times) – especially because there is a lack of industrial space to accommodate these uses. Retailers without e-commerce capabilities will need to evolve quickly and the need for conveniences like online ordering, curbside pick-up, etc. will become a necessity to compete with the larger retailers that offer these services as part of their platform.”
