Report Sees Gloomy 2009 for SoCal CRE

Business closures and slowing trade will negatively affect the office and industrial sectors well into 2009 in Southern California, according to a report released today by the Casden Forecast at the University of Southern California Lusk Center for Real Estate. The report found that the pendulum has swung from landlords to tenants for the first time since 2003. The combination of an abundance of office space and slackened demand has put downward pressure on rents throughout the region, and the report sees high vacancy rates and reduced demand through the end of next year. In Los Angeles County, the large amount of sublease space in the market will put pressure on office rents next year. Orange County’s 16 percent office vacancy rates are expected to continue in the near term, while the Inland Empire’s high unemployment rate will be a major contributor to the rising amount of empty office space. In her time covering the Southern California commercial real estate sector, Delores Conway, director of the Casden Real Estate Economics Forecast, says she is seeing some new and unwelcome signs in the market. “I’ve never seen negative office absorption in all of Southern California’s submarkets,” Conway said. Layoffs and consolidation at financial services firms have hit the Los Angeles County office market hard, and the market is going through the pain that Orange County went through last year. Some rock solid submarkets are seeing a great deal more sublease space entering the market. Conway notes, for example, that about one-third of available office space in West Los Angeles is sublease space. However, the report did find something of a silver lining, as limited office construction in recent years has tempered the rise in vacancy in Los Angeles. In the industrial sector, vacancy rates moved higher, but are still very low, and the report predicted that rents should stabilize in the near term. The Orange County office market should continue to be weighed down next year from the large amount of sublease space entering the market from distressed financial firms. But the minimal amount of new construction should help vacancies level off towards the end of next year. While Orange County saw 2.2 million square feet of new office product enter the market in 2007, there is only 159,000 square feet of office space now under construction. As for the county’s industrial sector, vacancy is predicted to hover around the 5 percent threshold, with rents likely to remain steady due to slowing demand. An abundance of new office space will take time to be absorbed in the Inland Empire. For an area with a population of four million people, the Inland Empire was “under-officed.” But with 2.3 million square feet being completed last year, and with 1.5 million square feet delivered this year. new office space has come on the market just as the area faces severe economic problems. Conway said healthcare companies have helped some, and have been fairly active in leasing space. The high level of industrial development activity in the Inland Empire will slow due to the slowing global economy. The absorption rate of speculative warehouse space is a concern, due to the combination of new supply and softer demand. With decelerating leasing and sales activity, developers are putting new projects on hold, and rents overall should stabilize around the current level. Conway said that unemployment levels, now at 8.4 percent in Los Angeles County: 6 percent in Orange County: and 9 percent in Riverside and 10 percent in San Bernadino Counties, which comprise the Inland Empire, is now higher than the 2001-2002 recession, and are approaching those of the 1990 downturn.