Fear Drives Lagging Retail Market

The retail market in Los Angeles is lagging behind. In the second quarter, retail lease rates decreased and negative net absorption pushed retail vacancy up for the first time in a year. Mitchell Hernandez, senior associate at CBRE, says that fear is driving retail activity down, and as a result, retailers have the opportunity to improve their value proposition and lease terms. To find out more about the market and what is behind the anemic activity last quarter, we sat down with Hernandez for an exclusive interview.

GlobeSt.com: What is driving retail lease activity down?

Mitchell Hernandez: Fear. Overall retail leasing is stable, but we are finding recent big box bankruptcies in the retail specialty segment are creating greater pause, requiring more due diligence and leading to longer lead-times to complete transactions. Whether this fear is rational or not, this is creating a greater opportunity for retailers to improve their overall value proposition and customer experience. The retailers that consider these two factors are finding the greatest success and leading overall activity.

GlobeSt.com: How have lease rates reacted to the decrease in activity?

Hernandez: What we are seeing as more of a trend is a blending of rents, regardless of product type and class of a center. For example, take a Class-A lifestyle center with a major high-end grocery anchor tenant and a C-Class strip center, both in West LA. They could very likely see the same or very similar rent thresholds of $75 per square foot without factoring in the difference in product type or the retail tenants. What we are seeing more and more is that the location is the primary driver. This is making it harder on the retailers as it is not taking them and their specifics, such as sales metrics, into consideration. Landlords have felt great pressure to keep raising rents. As acquisitions continue this year, owners try to underwrite their real estate based on deals in the area that just sold six months prior, which means rents continue to rise. Additionally, there is a decline in retail in some of the markets as property owners are shifting to other product types such as multi-family, which is resulting in higher land values; and lastly, construction is getting more expensive so owners keep rents up to account for these increases.

GlobeSt.com: Is this segmented to specific areas of Los Angeles?

Hernandez: This is not segmented to specific areas of Los Angeles, but it is intensified in areas where there are supply constraints and density in customer demand. Land prices are increasing, various product types from housing, office, industrial and retail are converging. The result is driving greater urbanization, giving customers greater access to goods and services. It will continue to be an exciting time for operators to achieve the greatest sales potential possible.

The retail market in Los Angeles is lagging behind. In the second quarter, retail lease rates decreased and negative net absorption pushed retail vacancy up for the first time in a year. Mitchell Hernandez, senior associate at CBRE, says that fear is driving retail activity down, and as a result, retailers have the opportunity to improve their value proposition and lease terms. To find out more about the market and what is behind the anemic activity last quarter, we sat down with Hernandez for an exclusive interview.

GlobeSt.com: What is driving retail lease activity down?

Mitchell Hernandez: Fear. Overall retail leasing is stable, but we are finding recent big box bankruptcies in the retail specialty segment are creating greater pause, requiring more due diligence and leading to longer lead-times to complete transactions. Whether this fear is rational or not, this is creating a greater opportunity for retailers to improve their overall value proposition and customer experience. The retailers that consider these two factors are finding the greatest success and leading overall activity.

GlobeSt.com: How have lease rates reacted to the decrease in activity?

Hernandez: What we are seeing as more of a trend is a blending of rents, regardless of product type and class of a center. For example, take a Class-A lifestyle center with a major high-end grocery anchor tenant and a C-Class strip center, both in West LA. They could very likely see the same or very similar rent thresholds of $75 per square foot without factoring in the difference in product type or the retail tenants. What we are seeing more and more is that the location is the primary driver. This is making it harder on the retailers as it is not taking them and their specifics, such as sales metrics, into consideration. Landlords have felt great pressure to keep raising rents. As acquisitions continue this year, owners try to underwrite their real estate based on deals in the area that just sold six months prior, which means rents continue to rise. Additionally, there is a decline in retail in some of the markets as property owners are shifting to other product types such as multi-family, which is resulting in higher land values; and lastly, construction is getting more expensive so owners keep rents up to account for these increases.

GlobeSt.com: Is this segmented to specific areas of Los Angeles?

Hernandez: This is not segmented to specific areas of Los Angeles, but it is intensified in areas where there are supply constraints and density in customer demand. Land prices are increasing, various product types from housing, office, industrial and retail are converging. The result is driving greater urbanization, giving customers greater access to goods and services. It will continue to be an exciting time for operators to achieve the greatest sales potential possible.