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L.A. County's Retail Market Struggles to Rebound in Q2 2023

7/24/23

This report was provided by commercial real estate services firm NAI Capital Commercial

MARKET OVERVIEW

In Q2, the changing economy caused a slowdown in L.A. County's retail market. Landlords with non-prime retail space experienced sluggish progress. The vacant space expanded by 746.9k sf this quarter, adding to the existing 18.2 msf. Occupancy is over 3 msf lower than Q2 2020, marking the start of the pandemic shutdown and indicating a long journey for L.A.'s brick and mortar retail sector to reach pre-pandemic vacancy levels. The current vacancy rate stands at 5.8%, surpassing the rate during the Great Recession in Q2 2010.

Despite the increased vacancy, landlords have not significantly reduced rents. The average asking rent in the region remained almost unchanged, with a slight increase of 0.7% compared to the previous quarter and a mere 0.3% higher than the same period last year. Net absorption showed a negative value of 572.6k sf quarter over quarter, resulting in a total negative absorption of 1.2 msf by mid-year, aligning with the rising vacancy. Additionally, available sublease space rose by 17.1% compared to the previous quarter due to excess capacity from existing retailers.

The retail real estate market faced the impact of high interest rates and tight credit, which weakened sales volume. The average sale price per square foot dropped by 13.2% year over year, and the sale volume based on square footage plummeted by 55%, totaling 4.4 msf year to date.

TRENDS TO WATCH

Landlords and sublessors are actively making adjustments to their asking rent to improve cash flow and fill vacancies. In the region, LA West currently has the highest amount of available retail space, totaling approximately 4.4 msf. To attract tenants, LA West has seen a quarter over quarter drop of 7.2% in asking rent for sublease space, now standing at $4.50 per square foot triple net. Sublessors may need to bear additional costs to entice replacement tenants, and some may still face challenges in filling large, vacant spaces. However, many landlords have not significantly discounted their direct asking rents.

LA West, renowned for its prestigious retail market and commanding the highest average rent in L.A. County, experienced positive absorption of 68.7k sf in Q2, resulting in a 10 basis point decrease in vacancy to 7.4%. Nevertheless, available sublease space in LA West increased by 6.6% quarter over quarter. Retailers seeking expansion will actively pursue well-located retail spaces offered for sublease.

In the largest retail market of the region, LA North, the average asking rent for direct space saw a minor increase of 1 cent, while available sublease space declined by 38.1% quarter over quarter. The competition between sublessors and landlords for tenants remains significant, especially for well-located spaces offered by retailers with existing leases looking to sublease. Sublessors and landlords will continue to aggressively compete in attracting tenants as the retail sector recovers. Tenants and investors will remain engaged in their search for opportunities as the retail market continues to evolve.


This report was prepared by J.C. Casillas, Managing Director, Research, NAI Capital Commercial







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