Retail rents are soaring throughout Los Angeles, driven by strong consumer spending and aggressive expansion by national chains.
The trend is especially pronounced in prime shopping neighborhoods such as those on the Westside, where double-digit annual rent increases are now commonplace, according to numerous L.A. brokers interviewed last week.
"You're in one of the high-disposable-income areas of the world in West L.A., and people are always looking for a bigger, better place to spend their dollar," said Daniel Blatteis of Blatteis Realty Co. "It's survival of the fittest who can offer the best product or ambiance."
Amy Raine, a senior broker at Cushman Realty Corp., said rents have risen 20 percent to 25 percent in the past year on the Westside and prime parts of the San Fernando Valley.
The steep rent hikes come despite concerns that the Asian financial crisis could slow economic growth and consumer spending in Los Angeles. Indeed, local retail sales were somewhat anemic for the second quarter, when same-store sales in L.A. County were up only 0.2 percent, vs. 2.2 percent nationally, according to TeleCheck Services.
That countywide figure, however, bounced back in July, when L.A.'s same-store sales were up 3.1 percent from the like year-ago month still lagging the national July growth of 4 percent, but nonetheless quite strong.
Regardless of short-term fluctuations in local consumer spending patterns, national chains are convinced that from a long-term perspective, Los Angeles is a dynamic market and they must be here.
"Retailers are expanding fast," said Mark Tarczynski, a retail specialist at CB Richard Ellis, citing such chains as Hollywood Video, The Gap and Buca di Beppo restaurants.
While comprehensive data is hard to come by because the retail sector is so dispersed, anecdotal evidence from retail brokers, tenants and developers indicates the L.A. market is healthier than ever.
"I've never seen it tighter," said Matthew May, a partner at brokerage Madison Partners. "If you're looking for 10,000 to 15,000 square feet, it doesn't exist. You have to build it. I'm looking for space for a nail salon and am having a hard time finding it. Anything good is getting leased up and the secondary stuff is what's left."
Deals are being made these days well before leases even expire, he said, especially on the Westside.
Chris Maling, a senior investment associate at Marcus & Millichap, placed the increase in L.A.-area retail rents over the past year at 10 percent to 20 percent.
"Rents are equal to or greater than in 1991, pre the downturn," said retail broker Michael Epsteen of Epsteen & Associates.
It's not just the most affluent parts of town that are seeing healthy activity.
Alhambra, Rosemead and Monterey Park, with their high concentration of Chinese and Taiwanese immigrants, are "stable, solid" areas, Maling said. In Rowland Heights, a two-story retail center with difficult access is 98 percent leased, mostly with Chinese and Taiwanese businesses, he said.
Shopping areas that are prospering the most, Epsteen said, are those with great access and visibility and near densely populated residential areas, be they in Watts or Santa Monica.
"I would say this is the fastest rebounding market I've seen. When it came back, it came back quickly," said Vincent Muselli, president of Muselli Commercial Realtors. "There was a period of time in retail where it didn't matter (how low) the rent was, there just weren't people looking to open new businesses."
But now plenty of businesses are looking to open or expand from huge national chains to tiny boutiques. Typically, they are displacing independent retailers, who are often relegated to side streets where rents are cheaper.
At the Third Street Promenade, for example, rents have doubled in the last couple of years, from $3 per square foot per month to at least $5 to $6.
"Local tenants can't afford to be there," May said. They are being displaced by national chains, such as Pottery Barn and Banana Republic, which relocated to the promenade from the adjacent Santa Monica Place enclosed mall.
One of the emerging hot spots is a two-block stretch of Robertson Boulevard between Beverly Boulevard and West 3rd Street, which has been transformed from mostly interior design shops to haute couture, with a corresponding elevation in rents. The street's monthly rents of $3.50 to $5 per square foot are about triple their level of five years ago, said May and they could go even higher once a city-funded parking garage opens this fall, attracting even more shoppers.
High rents and low vacancies have also propelled the retail investment market. This year, Maling expects to close $60 million in sales of retail buildings, up from $25 million last year. Many sellers weathered the recession, brought their occupancy back to pre-recession levels, and want to cash out.
"It creates a good opportunity for entrepreneurial investors," he said. Older centers are being bought and updated by new owners.
While the average retail rent in L.A. County is around $2 per square foot per month, sought-after areas fetch far more.
On Rodeo Drive, vacancies are under 2 percent (with the exception of the interior of the Rodeo Collection, which has several empty spaces), several brokers said. And rents have risen to $16 per square foot per month, from $10 a couple of years ago.
"With all these new wonderful stores on the street, if any flagship retail wanted to come in, like Tommy Hilfiger did, there's no room for them," said Blatteis.
With rents up and consumer spending strong, Rodeo Drive property owners/users are expanding their shop spaces, said Chuck Dembo, a partner with Dembo & Associates. Gucci, for example, is expanding its 7,500-square-foot shop to 24,000 square feet, at a cost of $15 million.
"They want bigger, more powerful statements," he said.
In the San Fernando Valley, Ventura Boulevard shop space in Studio City is scarce, with vacancies dipping below 5 percent. "If you came in now, you'd be paying 30 percent more than a year ago," Raine said of the prime locations.
Ventura Boulevard generally is commanding higher rents than it has in the last five or six years, Maling added. "Even in smaller strip centers with no anchors, we're seeing existing businesses expand or new start-ups coming in or adding new sites," he said, citing dry cleaners as an example.
Some pockets of the county haven't fared so well. Downtown hasn't rebounded much though its 15 percent vacancy level is better than the 22 percent rate during the recession, Tarczynski said.
Parts of Ventura Boulevard have gaps, notably in mid-block or two-story retail centers or centers in West Hills and Tarzana with limited parking. And Panorama City, Arleta and North Van Nuys have vacancies of 15 percent to 20 percent, due to lower-income demographics and poorly built retail space, which is mid-block or perpendicular to the street so storefronts are not easily visible to passersby, he said.
Even the once wildly popular Melrose Avenue has lost some of its appeal.
Sally Matsuishi, a 27-year-old writer, says she now prefers shopping for clothes and gifts on Robertson rather than on Melrose.
"There are a lot of younger designers here (on Robertson) and things that are different, you can't find anywhere else in the city," she said. Melrose has gotten more "Spice Girls," she said.
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