In-Depth In Southern California
Retail leasing brokers analyze the markets in Southern California. Some retailers remain optimistic, while others are being cautious.
Christine Deschaine, Tom Gioia, Ken Gould, Randy Dalby, Chad Fonceca and Nick DiCosola.

The turmoil in the capital markets and uncertainty in the economy have caused retailers and developers to re-evaluate expansion plans and new development projects across the Southland. The extent to which the problems in the credit market and economy have affected the Southern California retail market depends on who you talk with. Below, retail experts from Lee & Associates discuss their perspectives of the retail market in the following markets: Los Angeles, Orange County, San Diego and the High Desert (Inland Empire – North).

Despite Economic Downturn Los Angeles Retail Market Continues to Rise

By Christine Deschaine

In spite of negative future real estate projections, rents continue to escalate in the West Los Angeles areas. Retail leasing rates continue to rise in Santa Monica along the Wilshire Corridor, Third Street Promenade, Montana Avenue and Main Street. Vacancy factors continue to be less than 3 percent in West Los Angeles. Santa Monica’s Third Street Promenade is currently achieving some of the highest rents in West Los Angeles. New tenants to commit to Third Street Promenade are H&M and Forever XXI. The submarkets, such as Marina Del Rey and Culver City, continue to experience revitalization.

Burbank Village

Burbank Collection is a new retail development planned for downtown Burbank.

Downtown Burbank retail continues to grow with new projects such as The Burbank Collection — a premier project in downtown Burbank just across from the AMC 16 Theatres. In addition, existing storefronts are improving with new façades and regional tenants are taking advantage of a revitalization of the downtown area. Rents continue to increase with the lack of vacancy and new projects. Tenants such as Bed, Bath & Beyond, Loehmans, Old Navy, Chipotle, Cold Stone Creamery, Urban Outfitters, Romano’s, Granville, Ole My Sole, Active Ride, Barney’s Beanery, Skechers, Pinkberry and Johnny Rockets are open.

Hollywood

Hollywood Boulevard from LaBrea to Highland over the last 5 years has become the new home to tenants such as Tesco, Longs Drugs, H&M, Forever XXI and DSW, just to name a few. Hollywood & Highland Center, home to the Kodak Theatre, Renaissance Hotel and Lucky Strike, is the area’s largest concentration of retail shops and restaurants. Vacancy rates are less than 2 percent and regional and national tenants continue to search for new locations in the area. Mixed-use projects are on the rise in Hollywood, which will increase the amount of residential population in the area. Hollywood continues to be one of the most visited areas in California.

Slowing Economy in Orange County Causes Retailers to Become More Cautious

By Tom Gioia and Ken Gould

Due to current economic conditions, this is a time where many retailers are sitting on the sidelines, assessing the market. That said, there are numerous examples of retailers in Orange County that have recently closed stores: Sharper Image, Bombay Company, Nike Town, Levitz Furniture, Wickes Furniture, Ann Taylor, Hollywood Video and Blockbuster Video stores — and the list goes on.

Meeting the challenge and adjusting to this tough environment are smart value retailers like Costco, Target and value-priced restaurants, including fast food chains.

The retail vacancy rate in the central Orange County area has climbed from 4.4 percent to 5.7 percent in only the last 12 months. Surprisingly, lease rates during this period of time have increased an average from $2.68 to $3.04 per square foot triple-net. Landlords are succeeding in replacing the weak tenants with other retailers at higher lease rates.

Low cap rates are finally showing a slight increase in both larger grocery/drug centers and single-tenant buildings. This is a result of both a tighter financing market and a more cautious buyer.

Despite the credit crunch, some retail centers are still flourishing such as The District at Tustin (built by Vestar), which has opened with Best Buy, Costco and Whole Foods. The Irvine Home Center, located in Irvine Spectrum, recently signed a 90,000-square-foot lease on behalf of Living Spaces, replacing Treasures and Four Seasons Home by Lane. Treasures is relocating to a smaller space of approximately 36,000 square feet which was formerly occupied by Henredon and Drexel Heritage. This is a good example of struggling retailers being replaced by a value-oriented retailer.

In Fashion Island-Newport Beach, Nordstrom, Dean & Deluca are scheduled to open stores in 2009. Fashion Island reflects the success of the “open air” mall concept. This concept has been successfully applied to the renovation of the Huntington Beach Mall, renamed Bella Terra. Bella Terra has been gaining popularity as it’s just had its second summer after the grand re-opening.

San Diego Retail Market Changes Gears for 2008

By Randy Dalby

The retail sector of commercial real estate in San Diego is experiencing changes similar to other areas of the economy. Both sales and leasing of retail property are seeing some level of adjustment. Financing is becoming more challenging for investors and many retailers are pulling back their expansion plans in this first quarter. While there is still a strong appetite for retail property on both a sales and leasing basis, low cap rates and high leasing rents are making deals more difficult to get done.

Investors looking to acquire retail property in San Diego have their work cut out for them for the next 18 to 24 months. Asking cap rates still remain low in the 5.5 percent to 6.5 percent range for grade A product leaving investors little upside for their risk. There are still deals out there but the focus for both investors and lenders will be on existing tenant’s strength and the rents they are currently paying. The types of tenants will also be heavily considered as a few sectors of the industry are impacted more than others, i.e., furniture, home improvement and video rentals see sales volumes slip.

On the leasing front, while many retailers are watching their sales slide coming into 2008, both national/regional tenants and local tenants are carefully evaluating whether or not to expand. Heavy weights like The Home Depot and Starbucks Coffee, who have seen their stock price slide in recent past months, have pulled out of deals and significantly slowed new store openings in Southern California. Home remodeling and a $5 cup of coffee are now being viewed by shoppers as a luxury. There doesn’t seem to be any easy leasing transactions out there as retailers are extremely skeptical of a gloomy slowing economy. While vacancy rates remain still very low for San Diego County, somewhere between 3 to 4 percent, we’ll probably see those numbers increase over the next 18 to 24 months as the economy slows and the residential market adjusts. Asking rents have reduced as vacant spaces remain unoccupied for longer periods of time than we have seen over the last few years.

All in all for San Diego retail property, investor appetite in 2008 will remain strong as other investments appear to be more risky. Cap rates should continue to increase for 2008 making it easier for investors to make sense of acquisitions. Retailers will continue to expand in the county but at a much more cautious pace at least until sales rebound or financial and residential markets correct.

Retail Expansion Slows Down in the High Desert

By Chad Fonceca and Nick DiCosola

The High Desert region of Southern California is located along Interstate 15 approximately 70 miles Northeast of Los Angeles and 28 miles from San Bernardino. This region consists of five major communities including Victorville, Apple Valley, Hesperia and Adelanto with an estimated combined population of 400,000.

Over the past several years the region has experienced substantial growth marked by rapid expansion of existing big box tenants and an influx of several new large national and regional tenants. Specifically there has been expansion by Home Depot increasing their presence in the market from one store to three, Wal-Mart has expanded to five Super Centers, Lowe’s Home Improvement has expanded from one to four stores, and Target has increased its footprint as well, expanding from two to five stores, three of which are SuperTargets. The High Desert gained a WinCo Foods supermarket and Mervyns increased from one location to two. The expansion of these major retailers has characterized a period of strong growth for the High Desert region.

The High Desert has been riding the wave of this retail boom over the past few years and in recent months the area has experienced the same slowdown in the housing market as the rest of Southern California. Traditionally in this area retail trends have followed residential development and in looking forward it is anticipated that the retail market will see an increase in the vacancy factor based on projects currently in development and recently delivered.

During this period of readjustment one challenge that we have is that tenants are reevaluating their expansion plans, which causes a temporary increase in vacant space and, in turn, causes a downward pressure on the retail rental rates in the region. Tenants are considering spending the same dollar amount but reducing the size of space they seek and expecting more assistance from the property owners, all of this is a normal part of the adjustment process that the market is currently undergoing.

At this point based on the factors listed above competition is aggressive among retail property owners who are beginning to offer additional lease incentives to prospective tenants. Lease rates vary greatly ranging anywhere from $1.25 per square foot to $3.50 per square foot depending on the location of the property, co-tenancy and property age.

How long can we expect to see the current market conditions last? There is a strong correlation between activity in the housing market and the retail sector. Over the past few months housing activity has increased, with most of the absorption occurring in the foreclosure market. This activity marks progress for the housing market and we feel that the slow down in the residential market will return to stabilized levels by the fourth quarter of 2008, improvement in the retail sector should follow beginning in the first quarter of 2009. SCB

Christine Deschaine is a principal in the Sherman Oaks office of Lee & Associates; Tom Gioia is a SVP/principal in Lee & Associates’ Irvine office and Ken Gould is a SVP/principal in Lee & Associates’ Newport Beach office. Both brokers specialize in the retail market covering the Orange County region; Randy Dalby is a senior associate based in the San Diego - North office of Lee & Associates. He is a specialist in landlord representation in Orange County; Chad Fonceca, senior sales/leasing agent, specializes in the retail market and Nick DiCosola, senior vice president, specializes in retail, office and investment properties. Both brokers are based in Lee & Associates’ Victorville office.