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WESTERN SNAPSHOT, JULY 2006
Los Angeles Retail Market
The Southern California retail market showed no signs of slowing from the torrid pace of development, leasing and investment sales set in 2005. The trends in retail continue to be suburban and urban infill power centers, mixed-use projects with residential over retail, strong growth in rents, and a scarcity of quality retail investments continuing the downward pressure on cap rates. Retail tenants remain bullish in their expansion plans through 2007, and there have been no significant major tenant bankruptcies affecting shopping centers in the region. Industry experts continue to watch the supermarket industry with interest and caution as Wal-Mart continues the growth of its supermarket sales via their Supercenters and freestanding grocery units. The acquisition of Albertsons by Supervalu, Cerberus and Kimco is certain to bring changes to the chain. The Hispanic grocery chains continue to expand their presence in the urban markets throughout Southern California and particularly in Los Angeles.
Vertical retail will be the vehicle of growth for many major retailers including Wal-Mart, Kohl’s, TJX, Target, Bed Bath & Beyond, PetsMart and many others as quality sites in high-income urban areas present obstacles for traditional horizontal stores. Demolition is already underway on the site of a historic building in Pasadena to make room for a two-story, 75,000-square-foot Whole Foods Market supported by three levels of subterranean parking. Completion is expected in summer 2007.
Target, Kohl’s, Wal-Mart, The Home Depot and Lowe’s Home Improvement Warehouse remain the sector’s strongest and largest anchor tenants driving power center developments and setting the stage for 500,000-square-foot centers. While box retailers continue to seek infill locations throughout Southern California, they are most comfortable in the power shopping center environment with one or more of these major anchors and a compatible lineup of other box retailers. Two notable power centers that have recently opened are Downey Landing and Eastvale Gateway. Downey Landing is a 300,000-square-foot shopping center in Downey developed by Eclipse Development Group featuring Best Buy, Ross Dress for Less, Marshalls, Michaels, Bed Bath & Beyond, Staples, PetSmart, Party America, Pier 1 Imports and Old Navy. The center was sold to Investec immediately following its completion in first quarter 2006. Eastvale Gateway is an 805,000-square-foot shopping center in Mira Loma developed by Lewis Retail Centers and anchored by Target, The Home Depot, Best Buy, T.J. Maxx, Linens ‘n Things and Vons. Kohl’s and Party City are also slated to open there.
Current power centers are opening with less than 2 percent vacancy and are more often 100 percent leased upon completion. Target, Wal-Mart, The Home Depot and Lowe’s continue to try to purchase their parcels within these centers. Box retail rents range between $15 and $20 per square foot, and shop and pad space rents range from $30 to $48 per square foot. Quick service food tenants, restaurants, banks and other pad tenants including Starbucks Coffee, Panda Express, Cold Stone Creamery, Chipotle, Washington Mutual and Wells Fargo maintain a strong demand for space in these properties.
Mixed-use residential and retail projects have been the key to entry for both retail developers and tenants looking to develop in the space-constrained traditional urban and formerly suburban markets. These projects support land values in excess of $150 per square foot and meet the needs of most municipalities, which are starved for residential units in their downtown districts. While extremely complex, mixed-use projects usually garner the support of both local politicians and neighborhood stakeholders due to their reclamation of often blighted or high-profile yet under-performing properties. Two notable Los Angeles mixed-use projects include:
• The Burbank Collection, a “Luxury Live-Work-Play Urban Centerpiece,” on which Champion Development Group broke ground in April. The project is scheduled for completion in second quarter 2008. This 800,000-square-foot project is located in the heart of downtown Burbank adjacent to the 80,000-square-foot AMC theatre and 30,000 square feet of retail stores and restaurants constructed in Phase I. The $90 million project will include 118 for-sale residential units, 40,000 square feet of retail and restaurant space and 723 parking spaces added to the downtown parking inventory.
• NoHo Commons, JH Snyder’s project located at the southeast corner of Lankershim and Chandler in North Hollywood. This mixed-use development will include 292 residential rental loft units and 60,000 square feet of retail including a 32,500-square-foot HOWS grocery store, Wells Fargo and Cold Stone Creamery. John Gebhardt of JH Snyder expects this project to be completed in second quarter 2007, quickly becoming the cornerstone of the North Hollywood Lankershim corridor redevelopment project.
The Los Angeles retail investment market is on pace for another record year. Trophy retail projects continue to sell at historically low cap rates in spite of the uncertain interest rate market. Cap rates for large and small credit tenant shopping centers range between 5 and 6 percent in nearly every submarket. Scarcity of product continues to be the challenge for retail investors.
Hager Pacific Properties completed the sale of Baldwin Hills Crenshaw Plaza in Los Angeles to Capri Capital Advisors on behalf of an institutional investor for $136 million in January 2006. Baldwin Hills Crenshaw Plaza is home to the first ever three-story Wal-Mart, a 15-screen Magic Johnson theatre, Sears and Albertsons supermarket. In addition, there are more than 100 other retail stores in the project.
Chris Wilson is the president of Los Angeles-based Wilson Commercial Real Estate.
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