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10/26/23
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This report provided by real estate services firm NAI Capital Commercial
MARKET OVERVIEW
In Q3 2023, LA County's retail market recovery continued, marking three years post-pandemic. With construction easing and vacancy slowing down, landlords are contending with a changing economy, leading to mixed demand for retail space. The initial pivot back to brick and mortar from retailers that vacated space during the pandemic shutdown is now more about economic survival, as bankruptcy has caused several popular chains to close their doors. Nevertheless, the pace at which retail space is being vacated slowed significantly - up a mere 150k sf quarter over quarter in contrast to 1.6 msf or 9.4% year over year. While the total amount of vacant space on the market at 18.2 msf this quarter is at an all-time high, it appears to be reaching its peak this quarter. Still, the retail market has a way to go toward getting vacancy back to 'normal' levels. Since Q3 2020, when retail began to open back up from the pandemic shutdown, more than 1.9 msf of retail space was vacated.
Slack demand has prompted landlords to soften their concessions, lowering asking rents, and investors are reducing prices to close deals. The average sale price for retail space, at $276 per square foot, dropped by 17.2% from the prior quarter, while the average asking rent for direct space in the region decreased by 3.2% from Q3 2022. These declining prices have stimulated quarter-over-quarter increases in sales and leasing volume, with both experiencing a significant uptick of 119.5% and 11.7%, respectively.
TRENDS TO WATCH
Landlords with retail vacancies looking to improve occupancy are making concession adjustments as retailers continue to battle online threats, with Amazon being the usual suspect, and facing increased competition from direct-to-consumer e-commerce. While big chains like Walmart, Kroger, Costco, Walgreens, Target, and others maintain a strong presence in brick-and-mortar, they are not all immune to rising costs and stagnant revenue. Rite Aid, with 2,111 stores in 17 states and seven distribution centers, has filed for Chapter 11 bankruptcy protection. In its court filing, Rite Aid announced plans to “Reject Leases” at over 347 locations, 30 of them in Los Angeles County, to renegotiate more favorable terms from landlords in their reorganization. However, they plan to close 10 stores in Los Angeles County. Rite Aid's owned and leased stores range from 6.4k sf to 37.2k sf, and this will have an impact on the retail market. Rivals CVS and Walgreens may view this as an opportunity to expand, and retailers will compete for the better sites, while some locations may sit vacant as landlords work to secure new retailers.
In September, the Census Bureau reported that national retail sales surpassed expectations, indicating robust consumer spending in stores, online platforms, and restaurants, which strengthens the retail sector. However, despite the outstanding economic growth in the third quarter, investors should prepare for a potentially slower fourth quarter due to the tightening financial conditions in the economy. Retail property investment sales dollar volume dropped by 42.4% year over year as the average cap rate increased by 160 bps to reach 5.9%.
This report was prepared by J.C. Casillas, Managing Director, Research, NAI Capital Commercial
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