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5/10/24
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This report was provided by real estate services firm NAI Capital Commercial
MARKET OVERVIEW
In Q1 2024, L.A. County's retail market continued its slow path to recovery four years post-pandemic. Vacancy increased at the year's start as construction eased, down 7.4% from the previous quarter. The changing economy presents challenges, with demand for retail space shifting. Bankruptcies in 2023 led to closures of many popular retail chains, a trend ongoing as 'Store Closing Sale' signs greet shoppers at 99 Cents Only Stores, Rite Aid, and others, many in prime retail locations. Occupied square footage remains over 3 msf below pre-pandemic levels. The total amount of vacant space on the market, at over 18 msf to start 2024, is just shy of its all-time high, signaling the retail market's arduous journey to return vacancy to 'normal' levels. The site of an 85.5k sf, two-story former Bed Bath and Beyond for lease in a prime Westside location remains vacant. In 2022, Bed Bath and Beyond announced its plan to close nearly 150 stores across the U.S. as it faced potential bankruptcy.
Driven by economic survival and competition, some retailers are vacating space, while others are pivoting back to brick-and-mortar stores. This trend has led landlords to maintain asking rents, with investors keeping a keen eye on prime real estate. Sellers, for the most part, are holding firm on prices, avoiding major reductions to close deals.
Despite the challenging landscape, there are signs of improvement. The average sale price for retail space, at $478 per square foot, improved by 43.8% compared to the previous year, while the average asking rent for direct space in the region rose by 5.4% over the same period. However, current deals suggest that bid and ask prices may be too high, as quarter-over-quarter sales volume decreased by 18.0%, representing a 52.3% drop compared to the previous year's figures. Similarly, leasing volume in 2024 shows a quarter-over-quarter decline of 16.9%, amounting to 18.8% lower than last year's leasing volume, totaling 1.53 msf.
TRENDS TO WATCH
Consumer spending remains a key driver of the retail market's resilience as retailers, investors, and developers navigate interconnected challenges and opportunities. In a significant development, major players in the U.S. mall development sector, Macerich and Simon Property Group, have collaborated on a 50-50 joint venture to establish the Los Angeles Premium Outlets. This ambitious project aims to transform a landfill into a world-class shopping destination. Initially announced in 2018, plans for the 400k sf outlet mall in the City of Carson along the 405 freeway targeted a fall 2021 opening. Despite facing years of litigation with the city over environmental concerns, progress resumed on the project following an agreement between the City of Carson, Simon, and Macerich. The outlet is now set to open in 2024.
However, Macerich's financial difficulties have prompted speculation of property sales or deleveraging, triggered by a $300 mil loan default associated with the 527k sf Santa Monica Place outdoor mall. Mounting debt obligations have led to considerations of selling or transferring properties to investors, with elevated interest rates adding to the challenges of reducing its debt burden. Macerich attributes part of its decline to the bankruptcy of Express Inc., which announced the closure of 95 Express-brand stores in April as part of its bankruptcy plan.
On a different front, The Ratkovich Company and Jerico Development are jointly spearheading the development of the $170 mil West Harbor complex on the former site of Ports O' Call Village in San Pedro. This endeavor involves the revitalization of the San Pedro waterfront with shops, restaurants, and an amphitheater. Spanning more than 350k sf on a 42-acre site along the LA waterfront, the project launched in 2021, which has reported brisk preleasing activity, is slated for completion in 2025 and will feature a roughly 6,200-seat amphitheater.
As the retail market continues its recovery, investors, retailers, and developers in Los Angeles County stand ready to seize emerging opportunities.
This report was prepared by J.C. Casillas, Managing Director, NAI Capital Commercial Research
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