University of Southern California Forecast More confirmation of sustained growth was released recently. The USC Lusk Center Casden Real Estate Economics Forecast points to Strong Southern California Office and Industrial growth in 2007 and beyond. It lists the Inland Empire as the nation's top market for new industrial space, Orange County with record high office rents, and Los Angeles County with its lowest office vacancy rate in 15 years. Steady job growth, attractive climate, busy airports, good investor dollars are named in the report as reasons why 2007 will show excellent progress in this sector, in this region. The following are highlights from summaries of three regions taken directly from the Casden Report: Inland Empire Office: The office sector in the Inland Empire has been booming, largely due to the population increasing by 100,000 annually and office employment growing at 7 percent. The growing population is drawing banks, escrow companies and attorneys into the area. The fact that skilled employees are willing to accept lower wages in return for a shorter commute has also drawn firms focusing on medical equipment, computer technology, and electronic and precision instruments. The overall office vacancy rate of 7.3 percent is among the lowest in the nation. Class A office rents increased nearly 8 percent in 2006 to $2.11 per square foot, the highest in six years. Almost 3 million square feet of space is under construction, double last year's levels. Widespread development should continue in line with the maturing economy. Industrial: The Inland Empire is the top market in the nation for new construction of industrial space, the vast majority for warehouses and distribution centers serving the nearly 40 percent of all goods from Asia that pass through the ports of Los Angeles and Long Beach. Among all U.S. cities, the market had the highest net absorption in 2006 which encouraged new construction. Currently, 21 million square feet of warehouse/distribution space is under way. Though recent job expansion in the industrial sector is slower than in previous years, the future looks promising. Significant job creation is taking place at the conversion of the former George Air Force Base in Victorville into the Southern California Logistics Airport. Robust demand for large industrial space in the Inland Empire is likely to overcome any short-term market adjustments. Even double-digit rent increases past the current $0.40 per square foot still make the area competitive to neighboring Los Angeles and Orange counties. Market-wide vacancy rates should remain under 5 percent through 2007. Los Angeles County Office: The office market improved substantially in 2006 with the average vacancy rate dropping below 10 percent for the first time in over 15 years and average asking rents rising 11 percent. Investor interest in the office market should remain steady in the near term due to low interest rates and significant demand. Vacancy rates should decline steadily in 2007 with rents up around 6 percent. Downtown has hit historically low vacancy rates of 14.3 percent and there is talk of building new office space - a proposed Maguire Properties tower would soar 50 stories. Rents should continue to rise through 2007 thanks to a lack of available space and steady job growth. Century City, the submarket with the largest amount of new Class A space available, will continue to be a standout. Vacancy rates declined by 3 percentage points this year as prestigious law firms and the entertainment industry flocked to this valued location. Industrial: The Los Angeles County industrial market has the lowest vacancy rate in the country at 1.6 percent. With a total inventory of nearly a billion square feet, it is also the largest market of its kind in the United States and rents are up nearly 9 percent from a year ago. With international trade predicted to double over the next 10 years, the sheer volume of goods shipped from China, Japan and Korea has created an explosive demand for warehouse/distribution space. While congested freeways, overburdened rail lines and environmental concerns continue to challenge the greater Los Angeles region, the passage of Prop 1B, providing $20 billion in bonds to pay for infrastructure improvements, will bring much-needed improvements. Tight industrial supply will continue to put upward pressure on rents and property values. Orange County Office: The Orange County office market responded favorably to steady economic growth, closing the third quarter of 2006 with lower vacancy and higher lease rates. Average rents are up 12 percent this year and the vacancy rate is 7 percent. With an October unemployment rate of 3.6 percent, far below the national average of 4.4 percent and a state average at 4.5 percent, the resilient local economy is adding workers primarily in the business and professional services sectors. The slowdown in the mortgage and financial services industries has had a modest impact on growth so far. New office buildings should help ease the tight market when delivery of approximately 2 million square feet of new office space comes online in 2007. Half of the new construction is in the vibrant submarket around the John Wayne Airport with the other half in South Orange County. The sale of small buildings is the hottest niche in the market thanks to tenants wanting to own versus rent. Investors will continue to pay record prices as the outlook for the local economy remains healthy. Industrial: The Orange County industrial market turned in another strong performance in 2006, pursued by investors seeking financial opportunities and tenants seeking space. On the horizon is increased job growth, declining vacancy rates, rising rents, and significant demand. With limited new construction, tenants and investors are competing for a select few properties. This market will see continued strength as developers, short on land, turn to urban infill and redevelopment projects. Developers with land will continue to build what the market has been demanding - smaller buildings under 10,000 square feet. The Airport region, including Irvine and Newport Beach, should continue to be a seller's market with buyers finding quality product in short supply.
January 15, 2007