|This report provided by NAI Capital Commercial
LA County’s retail market post-pandemic recovery continued in Q3 2022. Easing vacancy, lower construction, and a growing demand for retail space helped landlords contend with the changing economy. Vacated space that was hastily put on the market during the pandemic shutdown is getting occupied as retailers pivot back to brick and mortar. Vacant retail space on the market decreased by 794.6k sf from last year at this time, cutting the total amount of vacant space on the market to 16.3 msf this quarter. Still the retail market has a way to go toward getting vacancy back to pre-pandemic levels. Since Q1 2020, at the start of the pandemic, more than 1.4 msf of retail space was vacated.
The drop in vacancy quarter over quarter boosted landlord’s confidence in holding firm on their asking rent for space listed for lease. The average asking rent for direct space in the region increased six-tenths of a precent from the previous quarter and 6.5% from Q3 2021. In contrast, the average asking rent for sublease space, to stimulate tenant demand, dropped 4.7% from the prior quarter. Net absorption registered a gain of 840.7k sf quarter over quarter and 736.8k sf year to date. Square footage sold increased 62.3% year over year and 24.2% from the prior quarter as sale transactions surged.
Trends to Watch
Markets with improving occupancy will continue to adjust asking rent. The LA West submarket, which holds 4.2 msf of available retail space, the most in the region, witnessed a 3-cent quarter over quarter increase in asking rent for direct space at $4.76/SF triple net.
While LA West captured the most net absorption in Q3 2022, totaling 469.6k sf, and vacancy declined, the vacancy rate in LA West remained the highest in the region at 6.6%. Moreover, sublease space increased 28.4% in LA West year over year as the average rent for sublease space dropped 3.9%. LA North, experienced a 4-cent increase in the average asking rent for direct space quarter over quarter while rent for sublease space declined 6.8% to $2.19/SF triple net – the lowest average asking rent for sublease space in LA County.
Sublease space in LA North increased 26.2% from the previous quarter. Discounted subleases and steady to raising rent for direct space will play out as the competition for tenants rises between landlords and sublessors. Sublessors will aggressively compete to attract stand-ins for their subleases. While the retail sector rallies back to pre-pandemic performance, tenants and investors will search for opportunity.
Net Absorption Trends
In the third quarter, retail market net absorption depicted the change in momentum. As the market added construction, demand stayed ahead of new supply added. Over the past five quarters 919.5k sf of retail space was completed while 1.324 msf was absorbed.
Sales volume increased 24.1% in Q3 2022 from Q2 2022 approaching $1.2 bil as users and investors sought opportunity in the market considering the positive outlook in demand for brick and mortar retail. The average cap rate inched down 10 bps from the previous quarter and from the third quarter of 2021 to 4.9%.
This report was prepared by
Managing Director, Research
NAI Capital Commercial
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