WESTERN SNAPSHOT, DECEMBER 2009

Los Angeles Retail Market

1. MARKET MOVES

Located immediately adjacent to the University of Southern California campus, University Gateway is a thriving, major mixed-use residential and retail project in a project category that is suffering throughout Southern California. While many mixed-use projects have stalled due to a lack of construction financing or from the deteriorating residential market, Urban Partners’ University Gateway is by all measures a big success. When completed in third quarter 2010, the 421-unit apartment complex capable of housing 1,600 USC students expects to open 100 percent leased. The ground floor of the development will offer a CVS/pharmacy and 65,000 square feet of restaurant and retail stores, including Subway, Kaplan, Verizon, Chase and Rubios. Rents are ranging from $42 to $54 per square foot NNN.

2. MARKET MEASURE 

At the conclusion of third quarter 2009, there were approximately 85 vacant retail boxes in the Los Angeles market representing nearly 3 million square feet. Twelve months earlier there was less then 250,000 square feet of vacant boxes in this market. The collapse of the financial sector, consumer confidence and finally consumer spending in fourth quarter 2008 shattered the retail sector, causing box rents to fall from an average of $17 to less than $11 per square foot today. Based on an average replacement store size of 35,000 square feet, 75 new leases would be required to re-stabilize the box market to 90 percent occupancy.

Shop vacancies in anchored neighborhood and community shopping centers have risen from an average of 3 percent to more than 9 percent, and rents have fallen between 15 and 50 percent dependent on the environment and the location in the twelve months since third quarter 2008.

3. THE MARK OF A MARKET

Density, income and diversity sets the Los Angeles market apart from many other major metropolitan markets. While not immune to tenant failures, rising vacancies and falling rents, L.A. is showing signs of recovery much quicker than in other markets. Many of the stores shuttered by Circuit City, Mervyn’s, Linens ‘n Things and the other failed retailers of 2008 and 2009 had locations in very dense Los Angeles submarkets with high land values, which made it virtually impossible for many retailers to enter in the previous 10 years. Many of these boxes will be re-leased to value and promotional retailers, including Target, Burlington Coat Factory, Ross, Marshalls, T.J. Maxx, Home Goods, Dollar Tree and Winco, bringing the customers who live in Los Angeles retail alternatives they never had before. 2010 will provide healthy value-oriented retailers with a generational opportunity to penetrate many of Los Angeles’ previously space-constrained markets at historically low rents.

— Chris Wilson is president of Los Angeles-based Wilson Commercial Real Estate.

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