USC Lusk Center Casden Real Estate Economics Forecast Says Southern California Office and Industrial Markets Poised for Solid Growth in 2006
• LA County rents on the rise with San Fernando Valley office space topping the charts
• Orange County Class A office rents soar nearly 12 percent overall in past year
• Inland Empire is the top U.S. market for new industrial properties
LOS ANGELES – Slow and steady gains in the overall economy will continue to improve office and industrial fundamentals in 2006 across Los Angeles, Orange, Riverside and San Bernardino Counties. This is according to results from the 2005 Casden Office and Industrial Market Forecast for Southern California released today by the University of Southern California Lusk Center for Real Estate.
“Stable job growth has helped to reduce office vacancy rates and raise rents throughout the region,” said Delores Conway, Ph.D., director of the Casden Forecast, at a briefing for real estate executives held this morning in Los Angeles. “Lease renewals reflect the positive outlook of business owners across diverse industries. In the area surrounding Orange County’s John Wayne Airport, rents have soared almost 13 percent since 2004 as businesses seek the convenience of being in the Newport Beach-Irvine corridor,” explained Dr. Conway.
“Southern California office and industrial markets will continue to hold their value through 2006 thanks to a flood of capital from mutual funds, REITs and pension funds needing to diversify real estate holdings and lock in long-term revenue streams,” she observed.
The annual Casden Real Estate Economics Forecast analyzes economic data on rents, vacancies, transactions and employment for the Los Angeles County, Orange County and Inland Empire office and industrial markets. The data was supplied by Grubb & Ellis which co-sponsored the forecast with the California Real Estate Journal. A multifamily housing forecast will be released on March 30, 2006. The following summarizes key findings in the current Casden Forecast:
Los Angeles County
Office: Vacancy rates dropped substantially throughout the LA Basin with the greatest absorption in West Los Angeles. Downtown’s 15 percent vacancy rates were last seen in the mid 1980s, a sign of renewed confidence in light of two large, new projects: the mixed-use Grand Avenue project and the LA Live lodging and entertainment complex. Almost all available office space downtown has traded hands since 2001, each time with prices inching upwards. Rents are on the rise in all parts of the city with San Fernando Valley Class A rents topping the charts at a 20 percent increase over last year. Rents are rising because multiple tenants are competing for short supplies of quality space.
Sales of office buildings continue at a record pace, with soaring prices for commercial property. Large amounts of investment capital are chasing a limited number of properties for sale. West LA commands the highest rents in the region with its concentration of entertainment, technology and media tenants including Yahoo!, America Online and Fox Sports. Century City is a standout with a seven percent drop in vacancy rates since last year and the county’s largest office project -- 2000 Avenue of the Stars -- to be completed next year.
Industrial: The LA County industrial market has the lowest vacancy rate in the U.S. at 0.8 percent and is the largest industrial center in the country with 969 million square feet of space. Rents are rising, but congested freeways, overburdened rail lines, environmental concerns and a shortage of industrial space all add up to new challenges for the greater LA region. Strong demand for industrial property for sale or lease continues with soaring prices from a constrained supply.
Orange County
Office: If Orange County were to identify a central business district, the Airport area around Newport Beach and Irvine would get the nod. For the first time in four years, this submarket has single digit vacancy rates of 8 percent. The area continues its dominance with the highest rents at $2.66 a square foot -- a 12.7 percent annual increase -- and the highest net absorption of 1.24 million square feet, half of all space leased in the county this year. It is no surprise that developers with entitled land in the area are starting construction on several office towers.
Companies attracted to lower rents in the North County area surrounding Fullerton helped push its vacancy rates to the lowest levels in the region. South County cities including Dana Point and San Clemente had the highest rents for Class A space due to an influx of new, higher-priced buildings.
Industrial: South County developers are capitalizing on the market for quality, low-rise residential condominiums converted from obsolete office space. South County showed the highest warehouse rents at $0.83 a square foot thanks to its proximity to the Inland Empire. Total absorption was an impressive 5.0 million square feet countywide, with most of the demand occurring in the North County.
Inland Empire
Office: The Inland Empire will continue to be California’s fastest-growing urban area over the next 10 years, gaining 10,000 people a year through 2010. Many companies in the past few years have opened new offices or moved to the Inland Empire from Los Angeles, Orange and San Diego Counties to accommodate shorter commutes and more affordable housing for employees. The office market remains competitive with rising rents and lower vacancies.
The office market in Ontario attracts firms desiring airport access and direct flights to most major cities. The city’s proximity to college campuses and major research institutions also makes it a magnet for high tech firms. The area around Ontario International Airport has the lowest vacancy rates and accounted for nearly a third of the space absorbed this year.
Industrial: Riverside and San Bernardino Counties comprise the best market in the country for constructing warehouses and new distribution centers. An ever-increasing amount of cargo transported through the region has turned the Inland Empire into a major distribution center. Large tracts of available land and railway, freeway and airport proximity have led to the development of modern warehouse and distribution facilities. As the region runs out of empty space, construction of large warehouses is pushing further eastward toward Redlands and Moreno Valley.
Editor’s note: Copies of the Casden Real Estate Economics Forecast 2005 Southern California Office & Industrial Market Report can be obtained for $75 by calling the USC Lusk Center at (213) 740-5000 or email: lusk@marshall.usc.edu.