The report was prepared by researchers at Marcus & Millichap Real Estate Investment Brokerage Co. A glut of new construction and slow leasing activity will push retail vacancy rates next year to 6% from today's 5%, the report says, while rent growth disappears as owners compete for the dwindling number of expansion-minded tenants.
There won't be an all-out crash like the one that accompanied the early 1990s recession, according to Stephen Stein, Marcus & Millichap's regional director. But "the market will see definite softening as local retailers struggle through the next year and developers continue to add more space than the market can absorb," he says.
Most retailers are already expecting slow holiday sales, Stein adds. The ports of Los Angeles and Long Beach saw a steep 10% drop in traffic from major retailers between July and October, he says, which indicates they long ago cut back their holiday orders to avoid over-stocking and the need to offer deep discounts to reduce inventory levels.
Nonetheless, retail construction continues at a brisk pace. About 8.7 million sf is expected to be completed in LA County this year, the M&M study says, and work began more recently on another 6.9 million sf. Vacancies are expected to rise a full percentage point in 2002, with strip centers and non-anchored retail properties the most at risk.
The county's current average retail rent of $1.79 psf per month is up 3.6% from a year ago, the report adds. But no gains are expected in 2002, in part because the glut of space "will create competition for tenants among property owners and contribute to the lack of rent growth over the next year."
Sale prices should stay flat too. "The current average price per square foot for all retail properties in LA County has increased to $109 this year, but this rate is expected to remain unchanged over the next 12 months as continued economic slowing and rising vacancies tame expectations for future market performance," the report says.
Though overall sale transactions have roughly matched last year's pace, the study notes that there has been a big drop in the number of large retail centers that have recently changed hands. Investors today are instead focusing on smaller strip centers and projects that are occupied by a single tenant, Marcus & Millichap says.
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