L.A.’S Dry Single-Tenant Retail Market

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GlobeSt.com

While single-tenant and multi-tenant retail properties are in high demand, there aren’t a lot of opportunities for investors in Southern California. Quality assets in the L.A. area rarely come to market, and when they do, pricing is competitive. In fact, this year, we have seen record-breaking cap rates on single-tenant retail properties. As a result, some investors are leaving Southern California to find more opportunities and better yields.

“Unfortunately, in today’s market in Los Angeles, there are very few quality single-tenant retail assets that come on the market and when they do, they are in very high demand,” Jeremy McChesney, EVP of Hanley Investment Group Real Estate Advisors, tells GlobeSt.com.

As a result of the limited opportunities, some investors are buying outside of Southern California, but McChesney says that only some investors are willing to leave the Southern California market. “Speaking in large generalities, there are two types of private single-tenant investors that we are seeing; one that wants ‘smog in their dirt,’ meaning they won’t buy anything but Los Angeles, or Coastal California, single-tenant retail assets. They are willing to pay “the freight” to be there,” McChesney says. “There are other investors who feel that a comparable Walgreens or 7-Eleven, or whatever quality tenant, in Southern California is just as good as one that is of similar quality located in Virginia or elsewhere outside California.”

Single-tenant retail properties are a passive investment, making it easier for smaller, private investors to buy outside of their local area. If they can get a better return in another market, that is an incentive to leave California. “There are investors that are comfortable leaving Los Angeles and there are others that are not,” he says. “Those that are comfortable outside of California continue to look at all the real estate fundamentals previously mentioned when making a decision.”

McChesney’s advice to investors looking to find opportunities in single-tenant retail is to continue to focus on location as well as tenant quality. “The advice is always the same when considering the purchase of any asset: location, location, location,” he says. “Quality of the location includes visibility, signalized intersection and access, demographics, drive-by vehicle traffic count. Additionally, there is the quality of the tenant, including credit worthiness and performance at the location, and length of the lease term remaining.” He adds that you have to ask if the tenant vacated the property for any reason, could you easily release it. In a strong location, the quality is yes.