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LOS ANGELES-Plenty of buyers lined up when retail properties came on the market in Los Angeles County this year, but the inventory of centers for sale remained low, pushing prices up and cap rates down–a trend that has defined the retail segment in the county for several years. Expect more of the same but with some subtle and gradual changes in 2005, says Gwen MacKenzie, a VP at Sperry Van Ness, who tells that cap rates reached record lows this year in the county.”We continue to have very little inventory to sell,” MacKenzie says, “and just about everything 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 cap between 6.2% and 6.3% before the year is out, MacKenzie says, adding, “There are rumors in the marketplace that we have a couple of properties that are going to close at sub-6% rates, but they haven’t closed yet.”

Talk of cap rates dominates discussions about the retail property sales market because, historically speaking, the returns that investors are accepting on retail properties are lower than they’ve ever been, MacKenzie notes, and she points out some other facets of the cap rate phenomenon that are just as surprising as the high prices that investors are willing to pay. Prices are high even for properties that are saddled with conduit loans and other existing loans that buyers must assume at above-market interest rates, she says. Even though interest rates ticked up in 2004, “They didn’t have as much of an impact on prices as some people thought they might,” the Sperry Van Ness broker observes, explaining that investors are still willing to pay premium prices for retail properties because the lack of land for new development, entitlement hurdles and retailers seeking store space create more demand than there is supply.”There continues to be a large number of 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 were only going to open a few stores in a region, but today we have more retail concepts trying to find space than we have had probably in the past 10 years.”Demand from national retailers is reflected in statistics from Marcus & Millichap, which show that national tenants filled much of the three million sf of new space built this year. At the same time, Los Angeles ranked among the best performing retail markets in the nation, with the third-lowest vacancy rate in the country at around 4.9%, and with strong retail sales translating into a 4.7% increase in rents to more than $24 per sf per month.With such demand for space showing no signs of slowing, “Even if interest rates go up next year, the sales of retail properties are going to continue to do well,” MacKenzie believes. However, she does foresee cap rates flattening or even rising slightly in 2005. “I think we will start to see more inventory come onto the market in the second half of the year, and I would anticipate that at some point some of the alternate investments to real estate will become more attractive,” MacKenzie says. “If that happens and less money chases retail, we will see cap rates edge up slowly or go flat.” None of the changes will be dramatic however. “Everything we’re looking at for next year, whether it’s job growth or interest rates or projected GDP or projected retail sales, is expected to grow moderately.” In general, 2004 was a good year whether owners were selling or holding onto their properties, with most properties stabilized and rents rising throughout the year. Next year, look for “less record-breaking and steadier, more moderate growth,” MacKenzie says.

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