4th Quarter 2013 Los Angeles Retail Market Recap

The Los Angeles Metro Market was the #1 market for retail deals in the United States in 2013 with a total deal volume of approximately $3.576 billion barely edging out second place finisher Chicago with a total deal volume of $3.546 billion. Manhattan was third with approximately $3.453 billion, Dallas fourth with $1.845 billion, and Houston was fifth with $1.616 billion.

This review covers the Los Angeles Market, which includes the Los Angeles, San Bernardino, and Ventura Counties as defined by Real Capital Analytics. The review includes three main topics; Volume, Pricing, and Fundamentals. The data includes deals over $2.5 million.

VOLUME – Dollar Volume & Year Over Year Change

Source: Real Capital Analytics

Source: Real Capital Analytics

The total volume for the Los Angeles Market for 4Q 2013 was $1.1 Billion which was down 7.7% from 4Q 2012 ($1.2 billion), however, 4Q 2013 volume was the same as 3Q 2013.

VOLUME – Number of Properties and Total Square Feet

Source: Real Capital Analytics

Source: Real Capital Analytics

 

There were 88 properties traded with a total of 4.3 million square feet, which represents a Year Over Year (YOY) decrease in the number of properties (128 properties in 4Q 2012) with only a small decrease in the total number of square feet (4.6 million sf in 4Q 2012). The average deal in 4Q 2013 was 45,864 versus 35,938 square feet in 4Q 2013. The trend is toward larger deal size.

 

PRICING – Price per Square Foot & Top Quartile Price per Square Foot

Source: Real Capital Analytics

Source: Real Capital Analytics

The average price per square foot was about $289, however, the top quartile was over $562 per square foot. The top quartile reflects some outrageous deals in Beverly Hills, one of which sold for over $7,000 per square foot!

PRICING – Cap Rate and Top Quartile Cap Rate

Source: Real Capital Analytics

Source: Real Capital Analytics

Cap rates continued their downward trend to 5.9%, which is down from 6.3% in 4Q 2012. The top quartile saw a decline from 5.8% to 5.1% in the same time frame.

PRICING – Cap Rate and Yield Spread

Source: Real Capital Analytics

Source: Real Capital Analytics

As would be expected with a decline in cap rates, the yield spread also thinned. With an average cap rate of 5.9% the spread over the 10 year treasury narrowed to 282 basis points in 4Q 2013, which is down from 4Q 2012 when the average cap rate was 6.6% with a spread of 496 points. Part of this narrowing is due to the rise in the ten year treasury.

FUNDAMENTALS – Institutional Vacancy Rate and Institutional Vacancy Year Over Year Change

Source: Real Capital Analytics

Source: Real Capital Analytics

The institutional vacancy rate was a reported 3.8% which was down 31.6%  from 4Q 2012 (5.6%). Institutional Vacancy Rate is defined as the percentage of the property’s net rentable square footage that is not under lease obligation, and may vary from physical vacancy.

FUNDAMENTALS – Institutional Effective Rent and Institutional Effective Rent Year Over Year Change

Source: Real Capital Analytics

Source: Real Capital Analytics

Effective rent also saw strengthening with an average rent of $30.70 per square foot per year which was up 5.0% from 4Q 2012 when it was $29.20. This increase outpaced inflation. Institutional Effective Rent includes all collected rental income from the property. More specifically it includes: Base Rent incorporating free rent and escalations, Contingent Income, Expense Reimbursement, Other Operating Income.

FUNDAMENTALS – Institutional NOI and Institutional NOI Year Over Year Change

Source: Real Capital Analytics

Source: Real Capital Analytics

With a decline in vacancy and a rise in effective rent, naturally there was a rise in NOI to $22.80, which was 10.9% higher than 4Q 2012. This calculates to an average institutional expense of about $7.90. Institutional NOI in 4Q 2012 was about $20.60 per square foot per year. Institutional NOI is climbing faster than the L.A. Metro annual inflation rate of 1.1% which is down from 1.9% for Dec 2012. Institutional NOI is defined as Institutional Effective Rent Rev minus Operating Expense. Operating expense includes the following: Ground Rent, General Administrative, Management Fee, Marketing, Other Operating Expense, Payroll And Benefit, Professional Fees, Property Insurance, Real Estate Tax, Repairs And Maintenance, and Utility Expense.