The 66.4-million-square-foot Los Angeles community-neighborhood shopping center market has the eighth lowest vacancy rate among the top markets tracked by Reis, up one spot from the prior quarter. As a major national market, Los Angeles has seen strength in other retail formats as well. Market observers, however, generally characterize Los Angeles as a market struggling to regain its balance as amidst uncertain signs in the national and local economies. “Despite news of an improving market, the Los Angeles basin retail market continues to have difficulty in gaining sustainable traction,” reports Colliers in its second quarter analysis.
The community-neighborhood shopping center vacancy rate is 6.3% in the second quarter of 2012 according to Reis, down 30 basis points from the prior quarter but up 10 year-over-year. Vacancy has been above 6.0% since early 2010, a high rate for this market. The lowest rate year-end for the most recent cycle remains the 2.4% recorded in 2006. The power center rate vacancy is 4.1%, down 80 basis points from a year earlier. Community-neighborhood centers in Los Angeles have far lower vacancy rates than the U.S. (10.8%) and West (9.1%) Region averages.
“Total vacancy for Los Angeles County increased 20 basis points to 5.9% from 5.7% reported during the previous quarter,” according to Colliers This source reports that “strip centers recorded the highest vacancy rate (8.5%), while super regional/regional malls have the lowest at 3.2%. Lifestyle/theme-festival centers recorded the largest increase in vacancy as it rose 80 basis points to 4.9%. On the other end of the spectrum, super regional/regional malls saw vacancy rates decline by 20 basis points to 3.2%.” Marcus & Millichap predicts that “countywide vacancy will decline 30 basis points to 6.0% in 2012 as the nation’s top retailers take a foothold in the Los Angeles market.” Reis forecasts a year-end rate of 6.1%, with gradual declines to follow, eventually reaching 4.4% in 2016.
SUPPLY AND DEMAND
After five years of negative net absorption totaling 1.4 million square feet, 2012 has marked a reversal. Net absorption for community-neighborhood shopping centers at plus 315,000 square feet in the first quarter and plus 219,000 in the second quarter brought the year-to-date total to 534,000 square feet. Reis predicts a total of plus 793,000 for all of 2012. Net absorption is expected to total 5.0 million square feet for the five years from 2012 to 2016, more than reversing the negative absorption this market experienced during the Great Recession.
So far in 2012, Reis’s latest construction data indicate the completion of three community-neighborhood centers with 370,745 square feet. This is more than half the annual completion average (560,000 square feet) for the 10 years ending in 2011, so at the halfway point, 2012 is shaping up to be an active construction year. Another 339,000 square feet of this type is under construction for completion in 2012 and 2013. Reis predicts that annual new construction will add 3.8 million square feet of community-neighborhood shopping center space from 2012 to 2016, not quite enough to match the 5 million total square feet expected to be absorbed.
“During the past 12 months, developers have added over 912,000 square feet of retail space in the county, amounting to a 0.3% gain in total inventory. In the preceding 12-month period, approximately 920,000 square feet of space was brought online,” Marcus & Millichap reports. During the second quarter, “Los Angeles County recorded negative net absorption of 245,000 square feet,” according to Colliers. “Four of the six different property types witnessed negative net absorption, of which community-neighborhood centers witnessed the sharpest decline of minus 133,000 square feet, while super regional/regional malls saw the highest amount of positive net absorption with a figure of 65,000 square feet.”
Community-neighborhood center rents rose slightly in the second quarter after 0.3% gains in the first quarter. Both the average asking rent and the average effective rent rose 0.2%, to $29.04 psf and $25.41 psf respectively. The year-over-year increases are 0.9% asking and 1.0% effective. Both measures had lost ground in 2009 and 2010 and only minimal annual gains were posted in 2011, so the current performance could be considered a rally of sorts. Power center rents continue to rise. The second quarter reading of $31.33 psf for the power center asking average is up 1.1% from a year earlier.
For all retail space in Los Angeles County, Colliers reports a weighted average asking lease rate of $28.08 psf, up slightly from the previous quarter. “Super regional/regional malls had the highest average asking lease rate” at $49.20 psf, according to this source. The asking average for community-neighborhood centers is given as $27.96 psf, along with $34.20 psf for power centers. Strip center space and single tenant buildings report rates of $19.44 psf and $24.60 psf, Colliers reports.
“Asking rents pushed up 0.8% to $28.16 psf in the first quarter. Concessions remained stable over the last 12 months as operators lifted effective rents 0.8% to $24.41 psf,” according to Marcus & Millichap. In the previous period, owners recorded a 0.7% drop in effective rents. In 2012, asking rents are expected to tick up 0.7% to $28.29 psf, while effective rents climb 1.3% to $24.66 psf. Last year, asking and effective rents increased at matching rates of 0.6%.” “Despite the slow economic recovery, the Los Angeles retail market continues to be one of the most attractive markets in the nation for chain and boutique retailers,” Colliers reports. Reis estimates that community-neighborhood center asking and effective rents will post gains of 1.2% and 1.3%, respectively, in 2012, with similarly modest gains to follow. Not until 2015 does Reis forecast annual gains for both measures exceeding 3.0%.