In the News
Clear Skies Ahead for Southern California Office and Industrial Markets
December 04, 2003
At today's USC Lusk Center Casden Real Estate Economics Forecast, Raphael Bostic, Ph.D., director of the Forecast, summarized the report's findings for an audience of top real estate execs from the region. According to the forecast, released today by the USC Lusk Center for Real Estate (www.usc.edu/lusk), Southern California's strong business performance, buoyed by economic diversity and continued growth in trade, bodes well for office and industrial markets through 2004.
"Rents have stabilized in several markets across Los Angeles County, the Inland Empire continues on a steady growth course and Orange County is showing signs of life in the Airport submarket," said Bostic. "The biggest story is Riverside's robust rebound covering six quarters and counting. This area felt the recession harder than other parts of the Inland Empire, but asking rents for class A property are now at historic highs while vacancy levels are at a five-year low. The Inland Empire will continue to lead the Los Angeles metropolitan area, with jobs, sales and income all growing at rates well over five percent in 2005."
The Casden Real Estate Economics Forecast analyzed data on rents, vacancies, transactions, and employment for the Los Angeles County, Orange County and Inland Empire office and industrial markets. Much of the data was supplied by Grubb & Ellis. A multi-family forecast will be released January 15, 2004. The following summarizes the key findings in the current Casden Forecast:
Los Angeles County
Office: While it endured a less than stellar 2003, the Los Angeles County office market should begin to show a noticeable turnaround beginning early next year thanks to expansion in manufacturing and growth in service employment. The Casden Forecast sees vacancy rates broadly retreating from current levels as heightened demand is seen across the county. Rents will stop their two-year downward creep next year and a reduction in concessions will be the first order of business for property owners facing increased demand for space. Pasadena and Burbank will continue their leadership with growing rents and declining vacancies. Properties in the low cost Mid-Wilshire submarket are poised to experience strong demand. The long-suffering West Los Angeles submarket will see some life as lease activity picks up in and around cities such as Marina Del Rey, but significant improvements are not expected in this submarket until 2005 when capital should return to the high tech and communications sectors in larger volumes.
Industrial: Although the overall picture for the Los Angeles County industrial market will be generally stable over the next two years, the improving economy will allow struggling submarkets to solidify. The manufacturing sector will be a key beneficiary of a one to two percent growth in county-wide employment that the Casden Forecast expects for both 2004 and 2005. That relatively low rate translates into roughly 60,000 new jobs per year. The hemorrhaging in the West and Central San Fernando Valleys will end, while Santa Fe Springs and other parts of the Mid-Cities submarket will see rents stabilize. But Carson and Compton in the South Bay will see rents continue to slide as they feel the heat of businesses moving to less expensive locations in the Inland Empire.
Office: The County has not recovered significantly from the dive in technology jobs that took place in 2001, but employment will show token growth in 2004 and approach a respectable three percent in 2005. Orange County's reliance on telecommunications, high tech and business services that has been a liability of late will prove to be an out and out asset in the next two years as the economy expands. Upward pressure could push office rents up by 10 percent between now and 2005. By the end of next year, the County should see vacancy levels close to their pre-recession levels of 12 to 13 percent. The most activity will center around John Wayne Airport, which has been the focal point of the market weakness the past three years. The Airport submarket was responsible for 44 percent of all net absorption in the County during the third quarter of 2003.
Industrial: Gradual growth next year will accelerate in 2005 and 2006, boosted by expected employment gains. The slight growth will not give landlords any pricing power, so those firms fortunate enough to survive the economic downturn should be able to lock in rents in the face of an impending rise in economic fortunes. A two to three percent rise in the average level of asking rents coupled with a 0.5 percent increase in vacancy rates over the next two years should be considered a positive move.
Office: Riverside and San Bernardino Counties will continue to feature strong office markets in 2004 and 2005. The main drivers are a strong trade sector and cheap, available land to help maintain the steady flow of new businesses to the region. Upward pressure on rents will be relieved somewhat by new office buildings opening. The rate of rent increases should slow in 2005 as the economy reaches a new, slower equilibrium growth rate. Vacancy rates will fall as occupancy levels rise, translating into significant profit opportunities for property owners.
Industrial: The Ontario Airport continues to be a strong focal point for the region's economic activity. Demand for nearby industrial space remains strong as firms and investors seek properties in less expensive submarkets located near transportation hubs. Total Inland Empire sales and lease activity in 2003 is more than double the rate for Los Angeles County's industrial market, pointing to the power of the airport and the wholesale trade sector overall. The Casden model predicts that 2004 and 2005 will be historic for the Inland Empire industrial market, with vacancy rates expected to fall by 10 percent from 2002.
Copies of the Casden Real Estate Economics Forecast can be obtained for $75 by calling the USC Lusk Center at (213) 740-5000 or by e-mail: firstname.lastname@example.org.