You are here

Industry Grids for Possible Downturn

September 25, 2001

Article by Jesus Sanchez

After recovering from the immediate shock of recent terrorist attacks, Los Angeles area commercial real estate players are preparing for a possible downturn in market activity in response to a weakened economy.

The region's commercial real estate markets were already softening in recent months, with vacancy rates for office and industrial space rising and rents remaining flat or edging down. In the wake of the attacks and financial turmoil, many real estate observers say tenants and investors will be even less willing to commit themselves to long-term deals and speculative ventures. Some have written off expectations of a year-end real estate rebound.

"What we are watching for out there is a slowdown in the business environment," said real estate broker David Toomey of Cresa Partners. "Obviously we are a bit concerned about what effect it might have on the real estate market. It can't be good." Some Southern California real estate deals were postponed and canceled in the last two weeks, say area brokers. One Orange County industrial tenant, for example, decided against moving into larger quarters and is negotiating a short-term lease with its existing landlord, said Cushman & Wakefield broker Jeff Chiate.

"I don't think anyone wants to make a major real estate decision," Chiate said.

Some New York-based firms affected or unsettled by the World Trade Center collapse have put some of their Los Angeles deals on hold. One New York entertainment firm, for example, has postponed lease negotiations for about 50,000 square feet of office space in Century City, according to Toomey of Cresa Partners.

Most deals and transactions, however, are going forward. Less than a week after the terrorist attacks, Boston-based Beacon Capital Partners finalized its $134-million purchase of the Trillium towers in Woodland Hills. One of the Beacon employees working on the transaction, analyst Heather Smith, was on one of the hijacked flights that crashed into the World Trade Center.

But the prospects of a national and regional recession are now greater, and that has tenants and investors as well as landlords and developers playing it safe and reevaluating plans.

"The real money is on the sidelines," said real estate consultant Larry Kosmont. "There will be very few deals that will close between now and the end of the year."

After a recent industry event, Stuart Gabriel, executive director of the Lusk Center for Real Estate at USC, said there was a great deal of uncertainty and anxiety among the real estate executives who attended.

"They're reconsidering some of their big stuff," Gabriel said. "It's the type of uncertainty that comes with the preparation of a war."

Investors and developers are shifting gears, looking askance at speculative retail and office projects and targeting less risky and less lucrative projects, such as first-time housing and industrial properties.

Last week, land broker Craig Atkins said he had no problems finding buyers for lots earmarked for moderately priced residential development in the Santa Clarita Valley. The properties sold at or above asking prices.

"The flight to safety in real estate is to primary and mid-priced housing," Atkins said.

After suspending their search for a few days, institutional investors told industrial real estate broker Darla Longo to keep looking for properties to buy. In some cases, the investors said they will be shifting more money into real estate and out of stocks.

"The capital markets are still very encouraged and want to buy real estate, particularly in industrial arena," said Longo of CB Richard Ellis.