Retail Capital Markets

The Los Angeles retail market has experienced moderate sales activity since early 2023. In the third quarter, sales reached $625 million, down from $757 million in the second quarter. This is a significant decrease compared to the average quarterly transactions of $1.1 billion in the L.A. metro area over the past decade.

Over the past year, private buyers have increased their market share. Historically, private buyers accounted for about 70% of sales, but in the last 12 months, they've made up over 80% of acquisitions. Their motivations vary widely, from holding onto quality assets to redeveloping outdated properties. In contrast, institutional buyers, private equity firms, and REITs have stepped back. While these groups typically represented around 20% of sales, they only accounted for about 5% of buyer activity in the past year.

In March, private investor TRC Retail purchased the La Cañada Town Center for $66 million ($570/SF) at a 6% in-place cap rate. The 116,000-SF property in La Cañada Flintridge, an affluent community, was 97% leased, with major tenants like Target, HomeGoods, and Anytime Fitness. TRC secured a $36.4 million loan (55% loan-to-value) for the acquisition. The previous owner, IDS, had bought the property in July 2011 for $40.4 million ($350/SF) at a 5.8% cap rate. The center, built in 2008, took over a decade to gain necessary approvals, highlighting the challenges of developing in La Cañada Flintridge, which makes this acquisition more appealing. This transaction illustrates current pricing for high-quality shopping centers in prime locations. Although the 2024 purchase price is 60% higher than the 2011 price, the cap rate is also higher, reflecting the impact of rising debt costs.

In another recent sale, a private buyer acquired a ground lease for a 2021-built Raising Cane's in Carson for $7.53 million ($2,700/SF) in June. The lease had just over 13 years remaining and offered a 4.65% cap rate. The lease includes 10% rent increases in 2026 and 2031, and the area boasts strong demographics, with a median household income of $95,000 and over 46,000 households within three miles.

Many retail transactions are driven by developers repurposing sites to take advantage of high land values in the area. For instance, in June, High Street Residential purchased a 4.8-acre parcel within the Northridge Fashion Center for $22 million ($4.6 million/acre) from Brookfield Properties. The site currently houses a 4,100-SF US Bank location. High Street Residential, a subsidiary of Trammell Crow Company focused on mixed-use and redevelopment projects, plans to begin construction on a 350-unit multi-family community there in early 2025.

Looking ahead, the outlook suggests asset prices will continue to decline through next year, with debt remaining expensive in the near term. Market conditions are expected to remain soft in the coming quarters, with little improvement in occupancy or rental rates, which may limit opportunities for investors in this property type.

Source: CoStar