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LOS ANGELES-Plenty of buyers lined up when retail propertiescame on the market in Los Angeles County this year, but theinventory of centers for sale remained low, pushing prices up andcap rates down--a trend that has defined the retail segment in thecounty for several years. Expect more of the same but with somesubtle and gradual changes in 2005, says Gwen MacKenzie, a VP atSperry Van Ness, who tells GlobeSt.com that cap rates reachedrecord lows this year in the county."We continue to have verylittle inventory to sell," MacKenzie says, "and just abouteverything we do have is selling for asking cap rates in the mid-6%range." There is talk of a property that is going to close at a capbetween 6.2% and 6.3% before the year is out, MacKenzie says,adding, "There are rumors in the marketplace that we have a coupleof properties that are going to close at sub-6% rates, but theyhaven't closed yet."

Talk of cap rates dominates discussions about the retailproperty sales market because, historically speaking, the returnsthat investors are accepting on retail properties are lower thanthey've ever been, MacKenzie notes, and she points out some otherfacets of the cap rate phenomenon that are just as surprising asthe high prices that investors are willing to pay. Prices are higheven for properties that are saddled with conduit loans and otherexisting loans that buyers must assume at above-market interestrates, she says. Even though interest rates ticked up in 2004,"They didn't have as much of an impact on prices as some peoplethought they might," the Sperry Van Ness broker observes,explaining that investors are still willing to pay premium pricesfor retail properties because the lack of land for new development,entitlement hurdles and retailers seeking store space create moredemand than there is supply."There continues to be a large numberof retailers constantly looking for new locations," MacKenzie says,and many of them want larger stores than they formerly occupied."Years ago, when I was in leasing, retailers would say they wereonly going to open a few stores in a region, but today we have moreretail concepts trying to find space than we have had probably inthe past 10 years."Demand from national retailers is reflected instatistics from Marcus & Millichap, which show that nationaltenants filled much of the three million sf of new space built thisyear. At the same time, Los Angeles ranked among the bestperforming retail markets in the nation, with the third-lowestvacancy rate in the country at around 4.9%, and with strong retailsales translating into a 4.7% increase in rents to more than $24per sf per month.With such demand for space showing no signs ofslowing, "Even if interest rates go up next year, the sales ofretail properties are going to continue to do well," MacKenziebelieves. However, she does foresee cap rates flattening or evenrising slightly in 2005. "I think we will start to see moreinventory come onto the market in the second half of the year, andI would anticipate that at some point some of the alternateinvestments to real estate will become more attractive," MacKenziesays. "If that happens and less money chases retail, we will seecap rates edge up slowly or go flat." None of the changes will bedramatic however. "Everything we're looking at for next year,whether it's job growth or interest rates or projected GDP orprojected retail sales, is expected to grow moderately." Ingeneral, 2004 was a good year whether owners were selling orholding onto their properties, with most properties stabilized andrents rising throughout the year. Next year, look for "lessrecord-breaking and steadier, more moderate growth," MacKenziesays.