Vacancy Rate Rise Seen in ’91 : Economy: Vacancies declined in downtown office buildings and industrial space attracted tenants, but the gains may not continue this year.
What kind of a year was 1990 for the commercial real estate industry?
Depending on whom you ask, 1990 was either a year of successes or failures, profits or losses.
In Burbank and Universal City, for example, office vacancies are below 3%. Office vacancies in downtown Los Angeles actually declined by about 3% in 1990 to 13%, and developers of industrial space continue to attract tenants, despite recession.
But many of the gains made in early 1990 are unlikely to repeat themselves in 1991. Office vacancy rates are expected to increase this year. In certain parts of Los Angeles, commercial property sales are down by as much as 75%.
All in all, it’s a mixed picture that even the experts have a hard time making sense of.
Office
Leasing activity declined by 18% in Los Angeles between 1989 and 1990, from 16.9 million to 13.8 million square feet. Figures compiled by Julien J. Studley Inc. reveal an even sharper 30% decline in leasing activity at new office buildings--thanks in part to their relatively high rents.
Not included in these statistics are sublease space and office buildings under 45,000 square feet. These two categories are very difficult to tally, but they clearly would add to local vacancy rates.
Office vacancies in the Los Angeles Basin, including central Los Angeles, the South Bay, the San Fernando Valley and West Los Angeles, stood at 15% by year’s end, according to figures compiled by Grubb & Ellis Co.
Net absorption of office space (defined as the net amount of new office space occupied) in Los Angeles County totaled about 4.3 million square feet in 1990, compared to 7 million square feet in 1989, says Grubb & Ellis--a decrease of about 40%.
Vacancy rates for 1990 were: Mid-Wilshire,12%; Glendale, 12%; Pasadena, 9%; San Gabriel Valley, 21%; West Los Angeles, 16.5%; San Fernando Valley, 13%, and South Bay, 19%. In the South Bay, vacancy rates ranged from a low of 10% in El Segundo/Manhattan Beach to a high of 32% in the LAX/Century Boulevard area.
New office construction in L.A. County totaled about 11 million square feet in 1990, compared to 14 million in 1989. In downtown Los Angeles, 6.4 million square feet of office space was under construction at the end of 1990; 1.7 million square feet in West Los Angeles and 1.2 million square feet in the San Fernando Valley.
A boom in construction has yielded substantial office vacancies in San Bernardino and Riverside counties. Tenant demand continues to focus on industrial space, while the need for major office developments is a relatively recent trend. As the Inland Empire’s population expands, the need for office space is expected to grow too, resulting in a better balance between supply and demand.
Orange County office construction has finally slowed after what seemed like a continuous supply of new office towers, especially in south county. Brokers expect several years to pass before all the space available in Orange County is filled.
“(Last year) was a very challenging and difficult year,” said Jerry Asher, senior vice president at Coldwell Banker Commercial Real Estate Services in downtown Los Angeles. “The rules changed. We didn’t expect things to go (downhill) as quickly as they did.”
“Office buildings have really taken a hit,” agreed H. Bruce Hanes, president of the Hanes Co. in Woodland Hills.
By contrast, industrial space, raw land and apartment buildings continue to sell and lease, said Hanes.
For buyers, “this is the best time I’ve seen in 20 years,” Hanes said. This is especially true, he added, for those who are cash-rich or well connected to sources of capital.
Industrial
Lease rates for Southern California industrial space remained stable or escalated last year.
Perhaps the most significant trend is a sharp drop in construction of speculative projects and a corresponding increase in so-called “build-to-suit” buildings, with developers lining up tenants for specific sites before construction begins rather than breaking ground first and hoping to fill the space.
‘I think it would be very difficult to find a lender willing to loan money for a speculative industrial project,” said Bruce Diller, a manager in the real estate services group of Arthur Andersen & Co. in downtown Los Angeles. For developers with precommitted tenants, though, “industrial real estate looks pretty good,” he observed.
Vacancy rates for industrial space surveyed by Grubb & Ellis stood at about 10% for Los Angeles County at year’s end, compared to about 8% at the end of 1989.
Whether vacancies continue to climb depends in large part on the economy. There’s less new construction slated for 1991 and demand continues to hold relatively strong, so vacancies aren’t expected to change significantly this year.
Central Los Angeles continues to have the largest existing base of industrial real estate and a hefty share of new projects. The Inland Empire is catching up, though, as many manufacturers and distributors find it cost efficient to locate outside Los Angeles County.
Retail
“Retail growth has ground to a halt,” said Diller of Andersen & Co. “Everything has cooled off.”
Even in such hot spots as the Santa Clarita Valley, Inland Empire, north San Fernando Valley and south Orange County, developers and retailers are reassessing consumer demand and taking a more conservative approach to new projects, said Diller.
“The lenders are taking very cautious postures at this point,” Diller added, especially when they are asked to finance traditional department store projects, which seem to be in oversupply.
Despite jitters about the future of retailing in the 1990s, Diller has not observed an increase in vacancies. “That’s a guardedly optimistic indication,” he said.
During the past few years, retail properties have outperformed other types of commercial property, noted Kenneth Leventhal & Co. in its most recent real estate forecast. But reduced consumer confidence and a decline in housing construction are expected to adversely affect retailers in 1991.
“I think we’re at the saturation point for retail right now,” said Mark Einbund, a retail broker with Grubb & Ellis in West Los Angeles. Nevertheless, discount retailers, factory outlets and so-called “power center”--anchored by such off-price giants as HQ Office Supplies Warehouse or Wal-Mart--continue to be popular.
There continue to be opportunities for savvy developers in the expansion and rehabilitation of older retail centers. Examples of this trend are prevalent in the San Fernando Valley and West Los Angeles.
“The good locations still lease,” Einbund said, but “landlords have to give more concessions.”
That trend, local experts concur, is expected to continue.
Foreign Investment
According to Kenneth Leventhal & Co., capital sources are “dry as the Mojave Desert.” In surveying 22 banks in five major cities, the company found consistent patterns of reduced loan volume, fewer loan applications and stricter underwriting.
The most common question: What will the Japanese do in 1991?
Japanese investment in U.S. real estate last year totaled between $10 billion and $13 billion, said Kenneth Leventhal, compared to 14.8 billion in 1989. The firm predicts investment by the Japanese to decline this year to $7 billion to $10 billion, with at least a third going to buy hotel, resort and golf-course properties.
In general, noted Leventhal, major investors from the Far East and Europe have adopted a wait-and-see approach to U.S. real estate.
