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GlobeSt.com: Where is the demand for retail today?

The CBRE team: Since the 2008/2009 recession, both institutional and private investors have shown great interest in seeking high-street retail investments and specialty retailers in the core markets of Southern California. These two uses have shown that they can achieve higher occupancy levels and rent growth. Street-front retail, which includes desirable shopping areas such as 3rd Street Promenade, Abbot Kinney & Main Street in Santa Monica, Rodeo Drive, Robertson & Melrose in Beverly Hills/Los Angeles and others, tend to draw customers from a higher disposable household income and offers a shopping experience that the internet cannot match. The specialty retailers, such as ethnic grocers, are able to find their niche in an over-crowded grocery market due to their ability to offer products that cater to the immediate demographic. Their sales often outperform national retailers by 20-30%. These recession and competition-resistant characteristics are drawing investors.

GlobeSt.com: Where are your clients' finding opportunities?

The CBRE team: We have worked with investors buying vacant or big-box properties with expiring leases. Many larger national retailers (i.e., Best Buy, Safeway, Office Depot) are closing or downsizing, due to internet sales competition and changing local demographic demands. Other stores are not providing the products that serve the preferences of the local consumers. This creates an opportunity for investors to work with their leasing team to sub-divide the space into more manageable units or re-tenant the space into a retailer that fits the area's demographics. A recent example of re-tenanting is when we sold a property that was occupied by a national grocery store that did not cater products that fit the local community due to its high price point of goods. We worked with a developer to acquire the site and lease the space to a specialty discount retailer that now pays rents nearly 35% higher than the former occupant.

GlobeSt.com: Is retail development back, and if so, where is it?

The CBRE team: Many private and institutional capitals are putting shovels in the ground in Southern California in both speculative and non-speculative development:

We have seen speculative development in the core/infill areas that are supported by transportation. For example, in the Downtown Santa Monica and West Hollywood sub-markets, we have seen sites for mixed-use developments (ground floor retail with a multi-family vertical component) selling without permits in place for record land-pricing. We recently sold some under-utilized retail in Santa Monica for over $400/SF for un-entitled land. The developer plans to build multiple 5-story mixed-use projects in the next three-five years at the sites.

We have also seen some non-speculative development with the re-emergence of ground leases. Many tenants are willing to build their new prototype buildings and maintain ownership of the improvements in return for a long-term land lease. Several ground leases, including Chase Bank, McDonald's, Chick-fil-A, and others, are selling at sub 5% cap rates, as banks and quick service restaurants are leading the way on ground lease development.

GlobeSt.com: What do you forecast for the future?

The CBRE team: We continue to anticipate 2014 having a great deal of demand and relatively flat cap rates. However, we do anticipate interest rates to eventually rise toward the end of 2014 and into 2015-2016, due to Fed tapering. This interest rate increase combined with the maturing CMBS debt market creates a great deal of uncertainty on how these assets will be recapitalized. But the bottom line is: today is a great sellers' market, and a good opportunity for buyers to lock in long-term debt at historically low rates.