USC Lusk Center Casden Real Estate Economics Forecast Says Strong Southern California Office and Industrial Markets Are Poised for Continued Growth
• LA County office vacancy rates reach lowest level in over 15 years
• Orange County’s resilient economy pushes office rents up to new highs
• Inland Empire is nation’s top market for new industrial space
LOS ANGELES – Steady job growth, bustling international ports, an attractive climate and an investor appetite for stable returns will keep the Southern California office and industrial markets on a healthy growth path into next year. This is according to results from the 2006 Casden Office and Industrial Market Forecast released today by the University of Southern California Lusk Center for Real Estate (www.usc.edu/lusk).
“The LA office market hasn’t looked this good since the late 1980s, Orange County’s resilient economy has bolstered demand for office space and the Inland Empire industrial market continues its dominance as a gateway for foreign goods,” said Delores Conway, Ph.D., director of the Casden Real Estate Economics Forecast, at a briefing for real estate executives in Los Angeles. “The slowing of residential construction appears to be offset somewhat by expansion in the financial, legal and personal services sectors in addition to increased trade from Asia,” she explained.
“Investor appetite for office and industrial space persists across the region, stemming from a constrained supply of product and a large amount of capital chasing a limited number of properties for sale,” observed Dr. Conway.
The annual Casden Real Estate Economics Forecast analyzes economic data on rents, vacancies, transactions and employment for office and industrial markets in Los Angeles, Orange, Riverside and San Bernardino counties. The market data was supplied by Grubb & Ellis, which sponsored the forecast along with Old Republic Title Company, Old Republic Exchange Company, Wachovia Bank, Washington Mutual, the California Real Estate Journal and Real Estate Southern California. A multifamily housing forecast will be released on April 4, 2007. The following summarizes key findings in the current Casden Forecast:
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. Rents soared in West Los Angeles -- up 15.4 percent -- with new tenants signing longer leases as a hedge against future spikes. Steady demand for affordable office space in the Mid-Wilshire area forced rents up 9 percent as a low-cost alternative to the expensive Westside. Mid-Wilshire and LA North/San Fernando Valley have the tightest vacancy rates at 6 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 LA 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 OC 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 two 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. Class A rents increased by more than 10 percent in most submarkets this year and rates will continue to rise as space remains tight across the county. The sale of small buildings is the hottest niche in the market thanks to tenants wanting to own v. 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. All submarkets experienced positive net absorption in 2006 and asking rents for all product types increased a staggering 14.5 percent to $0.87 per square foot this year. 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.
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.
The largest speculative industrial building in the nation – at 1.7 million square feet – is being built in Perris. 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.
Editor’s note: Copies of the Casden Real Estate Economics Forecast 2006 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.