2005 Looks Good for Office, Industrial

By Laura Coleman Industry analysts speaking at the Casden Office and Industrial Market Forecast 2004 on Dec. 2 anticipate continued growth for the coming year, despite being on the cusp of a downward cycle. Sound fundamentals, sustained economic growth and geopolitical challenges will propel the region into 2005, according to Delores Conway, director of the University of Southern California Casden Forecast. Of particular note, 2004 marked the first year of job growth of the decade. Sustainable, solid productivity levels, less accelerated than in 2003, bode well for the future, Conway said. "There's going to be room for employment growth," she said. "Firms are going to have to start hiring to keep demand with products." As further evidence of healthy job growth expectations, Conway cited increasing business investment, "a slow, steady indicator of growth" and the likelihood of job growth in the manufacturing industry. "This year the tide has turned ... [manufacturing] no longer losing jobs," Conway said. However, Conway stressed the importance of watching consumer reactions to changes in short-term interest rates, which the Federal Reserve has incrementally raised by one-quarter of a point at each of its last four meetings. The next meeting will be held December 14. If the Fed continues to tighten the monetary supply, Conway thinks that long-term interest rates, which are currently steady, could start moving up. "Consumer spending carried us through the last recession," Conway said. "But for how long can consumers maintain the buying frenzy within a hardening economy?" Although it is virtually impossible for investors to capture the high returns of a year ago, the strong cash flow from the investment market isn't showing signs of abatement, she said. Both the office and industrial markets have enjoyed a flurry of sales activity in the investment market. Additionally, small businesses buying office buildings in lieu of leasing have further limited the supply of quality for-sale properties. Despite a significant amount of office space on the market, Conway said rising occupancy levels and decreasing vacancy rates were causing rents to pick up slightly in Los Angeles County, with the exception of the South Bay and downtown markets, where vacancy remained high. Overall, she predicted a slow and steady improvement in the office market. According to William F. Hunt, senior vice president with Grubb & Ellis's Western region, a dearth of available product has changed the market. "In the last three, four years, selling everything was the answer," Hunt said. "Now, all the product is gone. Every single market in Southern California has just maxed out." Hunt said high vacancies and very little construction would help stabilize the rebounding downtown office market. According to Steve Jarecki, executive vice president with KBS Realty Advisors, the construction-materials shortage and associated high costs have made building from scratch prohibitive. "Existing properties begin to have more value because construction costs are so high," Hunt concurred. Jarecki cited a recent office transaction in Santa Monica that sold in excess of $400 per square foot in November. "Everything that is acquired today trades at a premium," he said. Jarecki said that today the London Interbank Offered Rate motivates deals, as opposed to cash, which enticed investors a decade ago. Industrial space remained tight, Conway said, with Los Angeles County at 2.5 percent. "There just is not much space available in industrial," she said. In addition, the available industrial supply is threatened by potentially lucrative conversions into multifamily product. "We're seeing a change in downtown as some of this vacant space is converted into apartments and condominiums," Conway said. With industrial vacancy levels at 1.6 percent in central Los Angeles, according to Jack Kyser, chief economist with the Los Angeles Economic Development Corp., preserving available industrial product is a big concern. Outsourcing is another issue of growing concern, Kyser said, with many companies relocating production to China and India, or neighboring Arizona. Congestion woes could further dampen the state's business climate as people increasingly make live/work decisions on mass transit, he said. "The overall forecast is good for 2005," Kyser said. "But there are a lot of unknowns." Among them, he said, the twin deficits - the trade deficit and the Federal budget deficit.