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Throughout the southern California coast there are iconic high-street retail locations. Everybody knows about Rodeo Drive in Beverly Hills, but what about the rest of the beach city storefront retail? Areas like the Gaslamp Quarter in San Diego, Highway 101 in Encinitas, Avenida Del Mar in San Clemente, Forest Avenue in Laguna Beach, Balboa Island in Newport Beach, 2nd Street in Belmont Shore Long Beach, Riviera Village in Redondo Beach, Abbot Kinney Boulevard in Venice Beach, and 3rd Street Promenade in Santa Monica. These areas are home to food and beverage, apparel, boutique gift shops, offices, hospitality, and other various mixed-uses. Nobody likes to talk about it, but these areas are experiencing higher than normal vacancy and slowly declining rents. This is do to online sales competition, unsustainable previously signed rents, and a general over-saturation of retail.
Now before you panic, here is the good news: Previous rents that were signed at historically high amounts, are now being replaced at more realistic levels that still provide investors with a healthy return on their investment. Investors are replacing these vacancies with viable tenants, but it is taking more time for a few reasons: Landlords are having to figure out what the best use is for these vacancies, there are fewer tenants in the market looking to expand, and most retailers are downsizing their footprints. Here are five things that you can do as an investor to better facilitate the evolving retail landscape for southern California coastal locations:
- Set realistic rent expectations: Don’t look in the rear view mirror with yesterday’s rent. Find out the real effective rent for the area and get the property leased.
- Select sustainable tenants: Don’t select the tenant willing to pay the highest rent. Evaluate which tenant will have the best longevity to avoid re-tenanting cost in the future.
- Give healthy tenant improvement packages: Don’t step over a dollar to grab a nickel. The best tenants in the market expect tenant improvement packages. They are worth it!
- Expect little to no rental growth in the near future: The vacancy you see today is from landlords getting too greedy and tenants going out of business. Make sure your rental growth projections are inline with keeping your tenant long-term.
- Be open to changing the use of the space: What was once a bank could become a restaurant. Survey the area to see what uses are lacking and target those tenants. Be patient with municipalities getting the uses changed instead of selecting a C grade tenant that will move in right away.
In response to: Overall coastal high-street properties are still a great investment. These tips will help set you apart during the retail evolution.
- This article was written by Nathan Holthouser on January 14, 2020 in response to National Real Estate Investment article: Once, High Street Retail Was a Safe Bet for Investors. Is That Still True Today?