Q3 2022 Retail Market Outlook – Los Angeles
MARKET OVERVIEW
LA County’s retail market post-pandemic recovery continued in Q3 2022. Easing vacancy, lower construction, and a growing demand for retail space helped landlords contend with the changing economy. Vacated space that was hastily put on the market during the pandemic shutdown is getting occupied as retailers pivot back to brick and mortar. Vacant retail space on the market decreased by 794,622 square feet from last year at this time, cutting the total amount of vacant space on the market to 16.3M square feet this quarter. Still the retail market has a way to go toward getting vacancy back to pre-pandemic levels. Since Q1 2020, at the start of the pandemic, more than 1.4M square feet of retail space was vacated.
The drop in vacancy quarter over quarter boosted landlord’s confidence in holding firm on their asking rent for space listed for lease. The average asking rent for direct space in the region increased six-tenths of a precent from the previous quarter and 6.5 percent from Q3 2021. In contrast, the average asking rent for sublease space, to stimulate tenant demand, dropped 4.7 percent from the prior quarter. Net absorption registered a gain of 840,702 square feet quarter over quarter and 736,753 square feet year to date. Square footage sold increased 62.3 percent year over year and 24.2 percent from the prior quarter as sale transactions surged.
TRENDS TO WATCH
Markets with improving occupancy will continue to adjust asking rent. The LA West submarket, which holds 4.2M square feet of available retail space, the most in the region, witnessed a 3-cent quarter over quarter increase in asking rent for direct space at $4.76/SF triple net. While LA West captured the most net absorption in Q3 2022, totaling 469,631 square feet, and vacancy declined, the vacancy rate in LA West remained the highest in the region at 6.6 percent. Moreover, sublease space increased 28.4 percent in LA West year over year as the average rent for sublease space dropped 3.9 percent. LA North, experienced a 4-cent increase in the average asking rent for direct space quarter over quarter while rent for sublease space declined 6.8 percent to $2.19/SF tiple net – the lowest average asking rent for sublease space in LA County. Sublease space in LA North increased 26.2 precent from the previous quarter.
Discounted subleases and steady to raising rent for direct space will play out as the competition for tenants rises between landlords and sublessors. Sublessors will aggressively compete to attract stand-ins for their subleases. While the retail sector rallies back to pre-pandemic performance, tenants and investors will search
for opportunity.
