Retail Repurposing Will Take Off This Year in SoCal

It is no secret that retail has undergone a dramatic evolution this cycle. As the market moves toward experience- and destination-drive retail centers, assets will continue to be repurposed into either higher-end retail or into a higher and better use. In many instances, that will mean retail, particularly big box spaces—will be converted into industrial distribution centers.

“There is going to be a repurposing of retail, whether that is converting big box retail into fulfillment centers or developing or redevelopment new retail into destination types of centers,” Chris Cooper, principal and managing director at Avison Young, tells GlobeSt.com. “For instance, the Grove is a destination with great restaurants, shopping and outdoor water features. Retail also is strong in Downtown L.A. because it is lifestyle retail and mixed-use projects, which are still very popular.”

This bifurcated trend in retail repurposing has created unusual market metrics. According to a recent report from Avison Young, shows that the retail vacancy rate in Los Angeles hit 4%, and rental rates increased 6.5% in 2018. However, lease rates have dragged, with leasing activity only a third of what it was in 2017, and leasing activity is expected to remain muted. “People have gotten wise and they have repurposed retail. In those projects, you have seen absorption and strong rental rate increases. Retail is moving from vanilla, middle-of-the-road retail,” says Cooper. “That is driving up rates and reducing vacancy. Retail can be very expensive and it is a massive undertaking. Some types of projects are growing, especially destination and experiential retail, and there is rental increases. However, developers, tenants and investors are being very cautious.”

Destination retail will command better leasing velocity and higher rental rates. “The higher end demographic will continue to demand a higher end of retail. The reason that you are not seeing a lot of retail deal velocity is because people are being very specific about what they want and they are being cautious,” explains Cooper. In those properties, landlords are also re-tenanting with better quality retailers. “You are also seeing re-tenanting going on where ownership is putting in a high-end tenant, especially to meet the demographic,” adds Cooper. “There are situations, however, where retail is not doing as well as it used to.”

Repurposing will continue to dominate over new development as well. There is so much retail to be redeveloped, most investment dollars are focused on those projects. “There isn’t a lot of new retail development going on, with a few exceptions, like Long Beach, which is on fire right now,” adds Cooper. “But, for the most part, investors are repurposing or redeveloping retail.”