Prospects for Office, Industrial Space Remain Strong
Southern California’s ongoing commercial real estate recovery should continue in 1999, with landlords raising rents even though several new office and industrial buildings will open their doors and compete for tenants, experts say. And many speculative investors who were scared off during Wall Street’s tumble earlier this year are expected to return to the marketplace.
The increased competition should provide some relief for tenants, who watched rents soar as available space disappeared in 1998. But rents are expected to continue to rise--though at a more modest pace--and vacancy rates will climb only slightly in some areas. The changes are characteristic of a stable market, observers say.
“You will not see the [upward] rent movement that you saw in the first half of 1998,” said Paul Lentz, president of the Western division of Transwestern Property Co., which manages and owns more than 6 million square feet of industrial and office space in Southern California. But “we feel good about the market. I’m forecasting a pretty good 1999.”
The early part of next year should also see a pickup in real estate investment activity, much of which was put on hold amid the turmoil that swept financial markets in the summer and fall. As that anxiety subsides, look for lenders and investors--including real estate investment trusts and pension funds--to once again begin funding deals and new development, observers say.
“We saw the investment market cool off dramatically,” said Al Beaudette, managing director of CB Richard Ellis Corp. “But it’s started to regain momentum.”
The pickup in construction activity in 1998 will result in an expanded amount of office space available for lease next year. About 6 million square feet of newly built space will arrive on the market--primarily in Los Angeles and Orange counties--in 1999, up from about 4.7 million that became available this year, according to estimates by CB Richard Ellis.
Despite forecasts for slower economic growth, real estate brokers and landlords say businesses in the region continue to lease more space, even in the manufacturing industry, which, at least nationally, has suffered at the hands of the Asian economic crunch.
In the Santa Clarita Valley, for example, Newhall Land & Farming Co. sold a record 110 acres for industrial development in 1998. Next year, that land will be transformed into about 2 million square feet of space, most of which will probably be leased to expanding companies that have been unable to find enough space in the San Fernando Valley.
“Most of that will be absorbed, given the current demand,” said Thomas L. Lee, president of Newhall Land & Farming. “We think we are going to have an exceptional year.”
So far, the only noticeable impact of the Asian financial crisis has been in Ventura County, where high-tech companies have become more cautious about taking up new industrial and research space, said Darla Longo, a broker with CB Richard Ellis.
Brokers and builders are counting on other types of industrial users, and distribution and warehousing companies, to eat up a lot of the new space that will come on line next year. In Santa Fe Springs, warehouse and manufacturing tenants have lined up for a new 10-building, 550,000-square-foot complex, Longo said.
“We have not completed construction, and we have offers on every building,” Longo said.
In Orange County, the red-hot office market should cool off as new buildings open up, giving tenants more opportunity to shop around. Instead of the rent increases as steep as 35% reported in 1998, Orange County office rents should rise by only about 5% next year, said Jack McNutt, a broker with Grubb & Ellis Co.
Two new office buildings in Irvine, for example, will add more than 400,000 square feet of space by year’s end. In addition, some large tenants, such as Fluor Corp. and AT&T; Corp., are moving out of state or to other parts of the county, opening up large blocks of space. Fluor alone will leave behind 350,000 square feet in Irvine as it shifts headquarters to Aliso Viejo.
Brokers are expecting a flurry of deals as tenants who waited the market out finally take advantage of the more favorable conditions.
“You have a number of new buildings coming on line and . . . that will put some pressure on pricing,” McNutt said. “You will see some landlords dip a little bit to make a deal.”
Meanwhile, the office market in Los Angeles County remains mixed, with downtown Los Angeles and the Mid-Wilshire area continuing a slow, uneven recovery. But intense demand and a scarcity of space will result in new buildings opening up on the Westside and in the Glendale-Burbank area.
In Santa Monica, more than 300,000 square feet of newly built space will become available at the Arboretum Gateway and the Arboretum Courtyard.
“These properties will be tremendously active in bidding for the large users,” said Nick Christensen, a broker for CB Richard Ellis. “They will pick up tenants from Class B buildings.”
Despite the additional office space, some Westside landlords and developers say the new commercial projects are a drop in the bucket compared with the total amount of existing space and won’t come close to meeting demand.
“Most of the new developments in [the Westside] happen to be across the street from each other in Santa Monica,” said Clifford Goldstein, a partner in J.H. Snyder & Co., a Los Angeles-based developer, who is looking forward to rent increases of as much as 10% next year. “I honestly believe that next year will be better than [1998] for landlords.”
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* COMING NEXT WEEK: Who will make headlines in 1999? The Times next Tuesday will publish its annual list of real estate industry people to watch in the year ahead.
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Market Trends
New office construction on the Westside of Los Angeles and the Burbank-Glendale-Pasadena area should result in higher vacancy rates next year. Vacancies in downtown Los Angeles and the South Bay, however, should continue to fall. Office vacancy rates by area:
Downtown Los Angeles, 1999 estimate: 20.3%
West Los Angeles, 1999 estimate: 12/5%
Burbank-Glendale-Pasadena, 1999 estimate: 15.5%
South Bay, 1999 estimate: 16.0%
Source: Cushman & Wakefield
