The New Real Estate Boom – The Sky’s the Limit

May 2014

With the U.S. stock market hitting all-time highs, interest rates hovering near all-time lows, and now news breaking that the Los Angeles Clippers may be sold for over 2 billion dollars, it is no stretch to question whether the U.S. market is getting out of whack. The same can be wondered about the real estate market—like the stock market, real estate is booming and there’s no sign of a slow-down. How much higher can it go? We met up with the top real estate brokers at the 2014 ICSC RECon in Las Vegas for our annual survey, and here’s what they had to say.

Luxury and High-End Fashion

“2013 and 2014 has been a period where rents have been rising significantly higher on the better streets of each market, with little or no vacancy in many situations. On the prime streets from New York to L.A. and everywhere in between, tenants have been in full force looking for space. Rents are 30% higher than they were last year, give or take. And for the best locations such as Rodeo Drive, Beverly Drive, Madison Avenue, Fifth Avenue, and parts of Soho, we see multiple offers. In secondary markets, we are seeing stronger interest from tenants than in recent years and an energy has come back to those areas,” said Jay Luchs, who is Executive Vice President at Newmark Grubb Knight Frank and is widely recognized as one of the country’s leading national retail experts serving both high-end fashion and luxury brands and the entertainment industry.

Despite his bullish view of the current market, Jay cautioned, “There doesn’t appear to be much more room for rents to continue to skyrocket; however, each time we say that, it seems that someway, somehow rents continue to rise.”

Still, not all streets are equal and the market is not on steroids everywhere. Jay put things in perspective, adding, “While the streets with luxury brands and contemporary fast fashion seem to be at the very best they’ve been in many years, people should keep in mind that these streets are not representative of the entire marketplace. Although Rodeo Drive is fully leased…” Jay paused to give us a scoop, “with the exception of one or two spaces that will be available in the coming months and will be leased before they even hit the market…there are nearby streets one or two blocks away where the rents are more ‘normal.’ In these areas, you have a combination of mom and pop tenants and other retail that appeal to the local communities. Something that I have noticed in a positive way in certain shopping communities is that landlords more and more are realizing that mixing restaurants with local tenants that might pay lower rent actually creates a more interesting environment for shoppers and creates a certain desire for higher-rent-paying retailers to be there. It is important in today’s world to have a uniqueness and not be like every mall in America.”

Houman Mahboubi, Managing Partner of BRC Advisors, and a leading expert in the city of Beverly Hills and other premium markets with a focus on both sales and leasing, concurred with Jay’s take on the luxury and high-end market. He told us that “investors have never been more hungry for retail real estate. The U.S. has become a playground for international high net worth buyers. The retail industry seems to be in full swing again with retailers paying top dollar to lease space, and that is driving down the vacancy rates to all-time lows. With enormous development taking place across the country, there seems to be a renewed optimism in the present and future market.”

Is this soaring high demand justified? Maybe not. Michael Townsend, President of Townsend & Associates and a national advisor for leading retail merchants throughout the country, noted sardonically, “Market observers continue preaching compressed cap rates, high risk capital, and trillions of investment dollars looking to deploy. All this as footfall and sales are generally flat and internet continues to outpace bricks and mortar by double digits. Yet tenants and investors have flight to quality mentality at record numbers.”

Renovations and Development

John Auber, President of the Auber Group, and a leading national tenant representative for over twenty years, was spot-on last year when he predicted that 2014 would be the year of renovations. John’s positive outlook for the year to come hasn’t changed, stating, “The redevelopment dollars that were being discussed in 2013 are in fact being deployed in 2014 and 2015. I would echo my comments from last year and acknowledge the heavy investment by landlords in their core assets as well as those they believe to have the opportunity to capture more market share and be the dominant retail option in the marketplace. Landlords’ expectations for overall occupancy is rising significantly as a result and a more competitive situation is created for tenants wanting to be positioned properly in the centers.” John added, “Tenant growth plans remain optimistic but are proceeding cautiously. New developments are not a priority for tenants who are looking for their stores to have a shorter maturity curve for sales productivity and profitability.”

Downtown Los Angeles

We reached out to our resident expert on the downtown Los Angeles market, Derrick Moore, Principal – Urban Retail Properties at Avison Young, who reiterated our panel’s bullish views: “Downtown Los Angeles continues to see strong growth. The market has truly responded and it appears to be firing on all cylinders. We are seeing retail segments that were never part of the downtown scene before, such as fashion and hospitality, including boutique hotels, coming in strong. The residential count in downtown continues to rise and retail is coming in to service that growing population. The grocery component has not let up, with Trader Joe’s rumored to be coming in next. Also rumored to be on the horizon is Mario Batali’s Eately restaurant. Rents year over year are up a good 10%. Growth is coming everywhere. I see further expansion into the Arts District and Broadway and 7th Street. Fashion is competing with restaurant for prime corners and I see a healthy clustering of fashion and specialty retail coming to the Broadway and 9th corridor adjacent to the Ace Hotel, which will likely expand further north along the proposed street car route. We’ll see additional development adjacent to LA Live where the Metropolis development will be breaking ground this quarter and bringing in additional retail, residential, and hospitality to DTLA.”

Every expert will tell you that real estate is cyclical. The question is how much longer and how much higher will this real estate market go. All signs seem to suggest that the market will continue to rise for the immediately foreseeable future. We would not be surprised if the market reaches new highs by this time next year. As for now, the sky’s the limit!