In retail location is critical. Rents for retail properties are rising fastest in areas of the Los Angeles where customers have been able to achieve wage increases and where home prices have been rising. This means that it is important to be strategic about where you invest and purchase retail property in Los Angeles.
All of the conceived projects that were built during the building boom up until 2007 are not performing as well. Much of the retail building took place in the later parts of the boom. This means that the retail sector has been harder hit than other parts of the commercial real estate market. In particular there were many poorly located strip malls constructed.
Strip renters have continued to be a soft spot in the Los Angeles retail market, with a vacancy rate of 8.5%. To give a comparison single tenant buildings currently show a vacancy rate of only 3.4%. While the picture for strip centers may not compare well to other parts of the market there are definite signs of an improvement in conditions. Vacancy rates drop by 40 base points.
Financing is another risk factor in the market. Retail development entrepreneurs financed construction with 10 year loans. Many of these will need to be rolled over in the next few years. If interest rates continue to rise on the back of an improving economy this could place owners under increased financial pressure. This also means that rents are likely to rise as tenants are required to absorb some of these costs.
For potential retail investors looking to enter the market this signals opportunity. With some strip center landlords likely to be under pressure and rents rising there may be chance for new investors to enter the market at attractive price points.
The outlook for retail centers is positive overall as consumers become increasingly confident in the strength of the resurgent economy. As employment continues to drop in Los Angeles consumers are increasingly able to spend their money on a variety of products and entertainment options. The rise in the residential property market is also helping retailers. As households see the value of equity in their home increase they are more likely to spend money. Retail chains in particular have been increasing rental rates for their tenants. Single tenant property landlords have been more hesitant to ask for higher rental fees as there are still concerns over the relatively recent recovery.