Midyear Forecast Paints Rosy Southland Picture

Southern California’s continuing business expansion will mean steady demand for more office, industrial and retail space through the rest of this year and into 1999, according to a real estate brokerage’s midyear forecast.

The Grubb & Ellis Co. report credits the strong regional economy and “growth in dozens of industries” with creating increased demand for all types of commercial space in Los Angeles, Orange, Riverside and San Bernardino counties.

While the forecast foresees varying levels of demand in the dozens of different markets within those counties, its overall tone is upbeat. It describes the current situation as “stable” and says the overall market has not fallen victim to the excesses that marred the 1980s.

“Commercial real estate in general is in a state of balance,” the forecast said. Demand for space is increasing, rents are rising gradually and new construction is proceeding at moderate levels.

Even in specific areas where commercial real estate activity is light, a slowdown doesn’t necessarily reflect weakness. An example is the Orange County office market, where space absorption, a measure of overall growth, has declined so far in 1998 compared with last year.

The decline is “not due to weakening demand,” the report says. The problem is “a lack of new speculative development to accommodate the continuing demand for office space.”

Demand for office space remains extremely high and is expected to stay that way in such hot markets as the Burbank media district, Santa Monica and West Los Angeles, where entertainment companies are willing to pay premium rates to be in the right location. This demand will drive new construction, but at a more measured pace than during the last building cycle.

Downtown Los Angeles, where much of the action took place in the hyper-1980s--before the recession and overbuilding produced a glut of high-rise office space--is described as a market that “offers tenants more alternatives at relatively low prices.” Prices there have been rising too, however, as rents go up in competing markets.

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The forecast says the central business district will become even more appealing with the completion of some key projects planned in or near downtown, including the new Staples Center sports arena, the Disney Concert Hall and movie industry sound stages.

Almost without exception, the Grubb & Ellis statistics show rising demand that has reduced the amount of empty space in all major categories--office, industrial and retail--and in all four major submarkets of Los Angeles County: Central Los Angeles, West Los Angeles, the San Fernando Valley and the South Bay.

The story is pretty much the same in Orange County, except that the overall market appears even stronger. The office vacancy rate fell to 9% over the last year, down from 13%. In Los Angeles County, by comparison, the overall vacancy rate for office space fell to 15.3% from 17%.

In the Inland Empire, where the office market has remained relatively weak and the vacancy rate stagnant at nearly 24% over the last year, Grubb & Ellis foresees slow but steady growth. The real action in the Inland Empire will continue to be in the building, buying and leasing of “big box” industrial warehouse space.

For the most part, other real estate experts and economists share the Grubb & Ellis view that the Southland’s growing economy will continue to translate into demand for more space, higher rents and appreciating property values.

Real estate consulting firm E&Y; Kenneth Leventhal expects Los Angeles to register the fourth-strongest economic performance out of 65 metropolitan areas the firm studied in a recent survey.

Tom Lieser, executive director of the UCLA Anderson Forecast, said Southland real estate should fare well because prospects for the economy remain sound, despite possible fallout from Asia’s financial problems.

“Southern California has caught up with the Bay Area in terms of growth rates, and our economy is probably doing even better than some people would have predicted as recently as a year ago,” Lieser said.

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The economic outlook means commercial real estate still has plenty of appeal for investors because properties still hold much potential for appreciation, according to broker Harvey Green of Marcus & Millichap.

In the apartment market in particular, Green said, “rents are just starting to rise” in Southern California and construction of new apartments is “on the horizon.” He said that if the Southern California apartment market follows the same pattern as that of Northern California, where the real estate recovery began sooner, the market will continue to tighten over at least the next year or two.

“The only factor we see that could put a damper on our outlook is if the government were to raise interest rates,” Green said.

Despite the generally upbeat tone of the Grubb & Ellis forecast, its authors expect the action to cool in some markets as available space fills and as some tenants move out of hot markets in search of lower rents. Other observers agree.

Hunt Barnett, a broker with CB Richard Ellis who specializes in L.A.’s Westside, said the pace of property sales may slow there because real estate investment trusts, which are among the most active buyers, have been pulling back lately.

However, Barnett expects rents to remain firm because demand for office space remains high, “supply is still relatively constrained,” and relatively little construction is scheduled. Barnett said an increasing number of tenants will look to the Miracle Mile and Downtown L.A. as alternatives to the more expensive Westside.

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Despite the consensus that the improving economy is lifting all of the markets, brokers point out that conditions still vary considerably throughout the L.A. Basin.

Bill Inglis, a CB Richard Ellis broker in the San Fernando Valley, said office rents have increased “only about 15% in the past two years” in the western part of the Valley, compared with much higher increases elsewhere. He said rent growth has been slow because there has been so much space available in places such as Warner Center. But that market has been tightening, and Inglis expects rents to move up the second half of this year.

In the South Bay, many business owners have changed their negotiating strategies in anticipation of rent increases, said John Ayoob, a CB Richard Ellis office broker. Tenants typically asked for leases of three to five years just two or three years ago, but they’re now seeking leases of up to 10 years, trying to lock in favorable rates, Ayoob said.