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The Real Deal Los Angeles

TRD Forum: Feared “retail apocalypse” forcing brokers to recalibrate expectations

Silicon Beach economy helping buffer the falloff, brokers say
By Gregory Cornfield | September 26, 2018 04:57PM

From left: Alexei Barrionuevo, Bryan Witkow, Owen Fileti, Jay Luchs and Elizabeth Clark

Real estate leaders throughout the country have been bracing for a “retail apocalypse,” as brick-and-mortar locations continue to crumble amid the rapid spread of online shopping.

In Los Angeles, a strong tech and entertainment economy is buffering the retail sector from a major meltdown, commercial brokers said Wednesday. But the rapid shift to online shopping is forcing them to re-calibrate their expectations for big retail leases — and to scramble to make up for the shortfall.

“We’re still getting deals done but there are less of them happening,” Jay Luchs, a broker with Newmark Knight Frank, said at The Real Deal’s real estate forum on Wednesday at Creative Artists Agency’s headquarters in Century City.

Luchs, who has reportedly been involved in a few recent record-setting retail property sales in Beverly Hills, said that the shifting retail landscape has made it more common for major brands to buy space and “control their own destiny,” instead of worrying about increased rents or disagreements with landlords when leases come up for renewal.

Rodeo Drive is probably better off than it ever has been, but there’s also just not a lot of opportunity there,” he said.

Luchs said his team has experienced a fall-off in retail leasing, likening the shift to dramatic changes in industries like music sales. “The Amazon stories are real,” Luchs said. “Online is real, and it’s changing our business without a doubt.”

L.A. has seen its share of major industry changes resulting from the retail shift, like the owners of the Westside Pavilion mall planning to convert 500,000 square feet into an office park.

Still, Elizabeth Clark, a broker at Pacific Union, said that fears of an apocalypse were overblown. L.A. “is not seeing a real scare in the marketplace,” she said. “We’re still seeing tenants come out of the woodwork.”

L.A.’s experience has been somewhat different than other parts of the country, the panelists said, in part because of its thriving tech economy. The birth of Silicon Beach has helped offset the downswing from places like Robertson Boulevard, where retail activity fell off dramatically in the wake of the 2008 financial collapse. (Luchs said that recently Robertson has seen falling vacancy rates and is beginning to thrive once more.)

Owen Fileti, a broker with LA Realty Partners, called L.A.’s booming tech economy the “fourth industrial revolution.”

A slew of major tech firms, including Facebook and Google, are pushing forward with plans to lease more commercial and office space in the South Bay of L.A., which includes Santa Monica and Playa Vista. Google is wrapping up the transformation of the Spruce Goose, which will become the tech firm’s new Silicon Beach headquarters.

Fileti said there are a few additional 100,000-square-foot deals coming to Los Angeles from major companies in Silicon Valley over the next few months. He declined to provide more details.

“San Francisco really started to price people out, so they are more often considering coming to Los Angeles,” he said. “We had four blockchain leases just this year. Last year, we had none.”

Fileti said Santa Monica continues to “reign supreme for tech,” but the boom is extending into other parts of West L.A. and Culver City, and even Hollywood.

The demand for office space amid the tech boom introduced Los Angeles to the co-working phenomenon. The modern work spaces and short-term leases have impacted the market. But Bryan Witkow, with the Tenant Group, argued the phenomenon has created an overabundance of such spaces.

“What’s going to happen to these places in a downturn?” Witkow said. “Where are all these mom-and-pop type companies filling WeWork spots going to go? Something is going to have to give when that happens.”