Middle Market Digest: This Week in Southwest

LOS ANGELES—Despite some shifts in sentiment, the market is continuing to perform well with vacancy rates across the board down, especially in Los Angeles, which is starting to see more retail vacancy this year. Here’s a look at this week’s trends, announcements and deals that you may have missed in Southern California, Utah, Arizona and Nevada.

BY THE NUMBERS LOS ANGELES—Builders are expanding the retail pipeline in 2017, driven by a broad array of projects in the Greater Downtown Los Angeles and San Fernando Valley markets. Deliveries are set to more than double 2016 totals, and the net absorption rate is accelerating. A large portion of the space under construction is already pre-leased or a build-to-suit project, such as the space for Ikea in Burbank that exceeds 500,000 square feet. As a result, a lack of deliveries in areas with rising retailer needs, including the Westside Cities and South Bay, will continue to bolster tenant demand for existing space. Meanwhile, less than 60,000 square feet of speculative space is underway in the entire metro, indicating that developers remain conservative in their outlook. As vacancy tightens this year, the average asking rent will climb by a low-single-digit percentage, an increase from the previous year. Low interest rates also play a role. Moderate interest rates are enhancing the appeal of retail properties, with a wide variety of assets at multiple price points and locations around the metro. Institutions remain consistent bidders for infill buildings near corporate offices and apartments, particularly in the South Bay, Westside Cities and Downtown Los Angeles. Meanwhile, private investors are seeking creative deal structures and venturing to more suburban locales to deploy capital at higher cap rates. As a result, additional cap rate compression could still manifest, despite a divergence of buyer and seller expectations. Recent interest rate moves and anticipated policy changes by the new political administration remain important factors influencing valuations. First-year returns remain in the mid- to high-4% range, while outlying submarkets can reach into the mid- to high-5% band.