Slowdown Likely to Have Minimal Effect on Real Estate in Area
Southern California commercial real estate is in fairly good shape to weather an economic slowdown but the era of soaring rents and plunging vacancy rates is over for now, said participants at an industry forecast conference.
Vacancy rates remain extremely low in many areas, and, with a few notable exceptions, new construction has not outstripped demand, according to industry observers. Many of Southern California’s major industries--such as professional services, distribution and foreign trade--so far have remained on solid ground and continue to expand, albeit at a slower clip. The drop in interest rates will help drive some investment and building activity.
Commercial real estate “will survive the economic turbulence pretty well in the next 18 to 24 months,” said economist Alison Lynn Reaser of Banc of America Capital Management Inc. at last week’s UCLA Extension/Los Angeles Times 2001 Real Estate Forecast in Beverly Hills.
But most every class of commercial real estate will see a slower year, with asking rents and prices rising only modestly if at all and tenants finding themselves with more options and incentives. Even the area’s industrial real estate--which has posted consistent rent gains for nearly seven years--has shifted into low gear, leaving some to wonder if rents have peaked for the time being, said industrial broker Terry Reitz.
“We don’t know if rents will hold up if the economy slows,” said Reitz, quoting industrial real estate investors who are balking at record prices.
Banks also are being much more picky about construction loans, and getting funding for speculative projects without tenants will be nearly impossible for all but the most experienced and powerful of developers with the strongest locations.
“We are not going to pull back,” said Tom Whitesell, senior vice president of Fremont Investment & Loan. “But we will be cautious.”
Southern California is expected to fare better than the northern part of the state, where the dot-com shakeout and slowing high-tech spending is expected to result in substantial increases in vacancies.
However, Southern California also must deal with the effect of the state’s ongoing energy crisis and some unique challenges, say conference panelists.
The energy crisis could hurt developers as they try to recruit new tenants and retain companies that are uncertain about reliable energy supplies.
“It’s a major problem in terms of perception,” said Los Angeles developer Rob Maguire. “It needs to be resolved as quickly as possible.”
Otherwise, Maguire said tenants are left wondering: “What else could happen?”
Many tenants in the entertainment business, meanwhile, have put expansion plans on hold in response to a possible writers’ strike later this year that could shut down the entire industry.
“There is no movement as a result of that,” said broker Neil Resnick. “We should expect nothing from entertainment this year.”
The commercial real estate market’s biggest weak spot remains retail. Although supermarket-anchored community shopping centers are strong performers and an investor favorite, the rest of the market has been overshadowed by a shakeout of major retail and movie theater chains, a potential slowdown in consumer spending and overbuilding.
“If you have a B and C location, you are going to suffer and suffer significantly,” said Dixie Walker of Grubb & Ellis. “Institutional [investors] are wary of retail properties.”
The real estate darling of the moment is the apartment industry, which is expected to see the vacancy rate fall to only 2% across Los Angeles and Orange counties this year.
“I don’t think anyone will be disappointed,” said David Casper, an apartment specialist with Grubb & Ellis.
