-Property sales remain strong as investment funds diversify portfolios using low-cost capital
-Leasing activity picks up with improved job growth
-Inland Empire is still the market leader
LOS ANGELES - Slow-moving indicators in the office and industrial markets camouflage the dynamic sales and leasing activity across Los Angeles County, Orange County and the Inland Empire, according to results of the Casden Real Estate Economics Forecast released today by the USC Lusk Center for Real Estate (www.usc.edu/lusk). "We've come through the recession with new job growth and optimism that the economy will continue to grow at a slow and steady pace. Economic activity occurring below the radar screen bodes well for office and industrial markets across the region," said Delores Conway, Ph.D., director of the Casden Forecast, at a briefing for real estate executives held at USC this morning. "Investment funds are voting with their money as they pour capital into office and industrial properties throughout Southern California. At the same time, business owners are buying office buildings and warehouse/manufacturing space in Riverside, Ontario and San Bernardino," explained Conway. The Inland Empire remains the market leader with a robust economy that encourages development.
The 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. Much of the data was supplied by Grubb & Ellis who co-sponsored the forecast with First American Title Company. A multi-family forecast will be released in March 2005. The following summarizes the key findings in the current Casden Forecast:
Los Angeles County
Office: Soaring prices for office buildings will continue due to years of constrained construction and a large amount of investment capital chasing a limited number of properties. While parts of the market are still experiencing high vacancy rates of 19 percent in downtown Los Angeles and the South Bay, rates will decline in 2005 as job growth picks up throughout the county. Expect only modest increases in asking rents with the exception of West Los Angeles where the long-awaited leasing recovery seems to have arrived. The San Fernando Valley submarket offers the strongest clues that a recovery is underway as vacancy rates dropped from 12.8 percent in 2003 to 10 percent in 2004. Pasadena and Burbank will continue their leadership in rising rents and declining vacancies.
Industrial: With over 500,000 manufacturing workers, Los Angeles County is one of the largest industrial markets in the country. Current vacancy rates at 3 percent should remain low due to a shortage of large blocks of vacant land and the rise in residential loft development in older downtown warehouses. The Alameda Corridor will continue to spark the industrial market in Central Los Angeles while the San Fernando Valley submarket attracts companies looking for large warehouses in Valencia and Santa Clarita. Expect continued stability in lease rates during the next two years.
Orange County
Office: Orange County continues on a steady road to recovery. The office market will benefit from continued economic expansion with vacancy rates declining as they approach their pre-recession levels. The Airport submarket showed the strongest net absorption - 900,000 square feet - in 2004, accounting for almost half of all leased space in Orange County. Countywide vacancy rates should continue to decline at a steady pace due to limited construction and increased demand. But stronger levels of job creation are needed to put the office market on firmer ground. Landlords should begin to see improvements in asking rents and office lease rates in the next two years.
Industrial: While the county has not recovered completely from the 2001 recession, job growth is positive and should increase to approximately 2 percent in 2005. But don't expect significant demand for industrial space until late 2006. Rents will remain flat with a slow improvement in vacancies. The Airport submarket is witnessing more active leasing that will continue next year. The North County submarket is also improving from its proximity to the powerful Inland Empire economy.
Inland Empire
Office: The Inland Empire market remains strong, driven by international trade and available cheap land. The Ontario Airport submarket is keeping office rents on the rise in San Bernardino County where demand outpaces the growing supply. Labor has expanded to such a degree that technicians, professionals and executives are joining the job ranks and creating demand for office space across Riverside and San Bernardino counties. Rising rents in 2004 are expected to continue in the next two years.
Industrial: The Inland Empire will continue to lead the Los Angeles metropolitan area with employment growth of 5 percent in 2005. The industrial market is very dynamic, with robust leasing and sales activity, rising rents and declining vacancy rates. Construction remains active in the area, boding well for the economy. If long-term interest rates remain low, expect net absorption to be moderately strong with increased sales activity. The Inland Empire will show the greatest amount of new development over the next two years, continuing a long-standing regional trend.
Editor's note: Copies of the Casden Real Estate Economics Forecast can be obtained for $75 by calling the USC Lusk Center at (213) 740-5000 or by e-mail: lusk@marshall.usc.edu.