branch manager for Studley. “A controlled development pipeline and a
multi-faceted local economy should
keep leasing activity and supply in
check to prevent any dramatic increases
in availability that could put pressure
on landlords. Unless a protracted recession ensues, firms shouldn’t anticipate a
dramatic shift in the office market for
the next few quarters. Rather, a more
gradual softening is likely.”
Other market watchers concur with
that assessment. “Low unemployment,
meager inflation, a tremendous increase
in trade with the Pacific Rim and the
continued insatiable demand from both
investors and users that have maintained high valuations regardless of the
credit crunch, coupled with limited supply, have all created the perfect storm
for the bullish atmosphere in Greater
LA,” declares Mark Berman, senior
vice president at UGL Equis.
Even with an unemployment rate
that has edged up from 4.4% to 5.3%
during 2007, the marketplace’s diversified tenant base, underpinned by many
mid-cap companies, should insulate it
from any economic disruption, maintains Lisa St. John, a locally based managing director with Jones Lang LaSalle.
If there is one blot on this otherwise
sunny outlook, it’s the crash of the subprime mortgage industry. “Sublease levels rose slightly during the fourth quarter, driven by layoffs related to the
adversities faced by mortgage and
biotech companies such as
Countrywide and Amgen located in the
San Fernando Valley and Tri-Cities
markets,” says St. John. This caused the
vacancy rate to remain relatively static
at 11.3% over the year. Certain submarkets with larger exposure to the mortgage financing sector will see increases
in the level of subleases coming to the
market in 2008.”
But for now, landlords, especially in
constricted submarkets, have the upper
hand. Michael A. Zugsmith, chairman of
NAI Capital, details that buildings in
West LA, Burbank and Pasadena are
fetching rents above $50 a sf and in a few
select markets, the price is $75 a foot.
The vacancy rate in the LA office market
has been in the sub-10% range since
2005. Consequently, “activity is shifting
to areas with good availability and lower
rents, including the South Bay and
Downtown Los Angeles. Construction
has increased, and 6. 5 million sf is currently under way, but most of this space
will not come on line until 2009.
Vacancy rates in 2008 are expected to
remain low,” Zugsmith states.
Owners who bought at the top of the
market in ’07 will be less amenable to
lowering asking rents, Catalano says.
“These owners are more likely to offer
increased concessions before they lower
face rents,” he says. “Non-institutional
landlords who have owned assets
through multiple real estate cycles and
have more flexibility with asking rents
might be able to snare prime tenants
moving from the tight and high-priced
Westside, where landlords still don’t
feel pressure to increase concessions or
lower rents.”
In markets with particularly skinny
vacancies, some owners have increased
asking rents “to a level that is difficult to
legitimize,” Berman says. In those
instances, fewer new deals with incoming tenants are being done at those
higher rates. “Instead, tenants with certain contract terms remaining are
‘forced’ to lease any space that becomes
available at the landlords’ higher
quoted rate,” he explains.
But a shift is now under way, Berman
says. “For the first time in years, landlords
began to offer bonuses to brokers for touring, writing proposals and/or closing
deals on behalf of clients,” he finds. “A
meaningful decline in rental rates should
be in place by the end of ’08.”
If the availability in the office market
is slim, then vacancies in the industrial
sector are nearly invisible. NAI
Capital’s Zugsmith characterizes Los
Angeles County as “the tightest large
industrial market in the US.” The bulk
and manufacturing subsector sports a
vacancy rate of near 3%, with R&D
space coming in at 5%.
Likewise, CB Richard Ellis pegs the
Greater Los Angeles area’s industrial
vacancies at a meager 1.6%. With availabilities limited, renewals and subleases
account for the bulk of the activity,
putting the squeeze on tenant expansion and setting the scene for a wide gap
between gross leasing volume and net
absorption. For this reason, Los
Angeles County posted negative net
absorption of 1. 8 million sf in 2007,
even though leasing activity totaled a
healthy 36 million sf.
Retailers and restaurants are looking
to grow, keeping the retail sector strong,
Zugsmith states. Much of that expansion is taking place in mixed-use developments and smaller, vertical projects
of between 80,000 and 175,000 sf.
“Demand is also strong for projects at
the new transit hubs that are emerging
in Los Angeles,” he says. “In addition,
retailers are expanding to serve the residents Downtown.”
The amount of untenanted retail
space ranges between 1% and 2%,
Zugsmith reports, with rents rising by
4% to 8% a year. “However, some slowing may occur if the economy should
also slow,” he warns.
With many of the Southland’s residents still unable to make the leap from
renting to homeownership, the apartment market in the Los Angeles region
is on track for another strong year.
According to Marcus & Millichap, the
income required to purchase a median-priced home is nearly $100,000 more
than the metro’s median household
earnings.
Construction of new apartment units
is expected to rise this year, increasing
to 4,700 from 4,500 in 2007, reports
Marcus & Millichap. Vacancies will
swell slightly by 20 basis points to 3.7%.
Despite competition from new residences, asking rents will see a 5% inflation to $1,504 per month by year’s end,
while effective rents move up 4.8% to
$1,452.—Maria Wood
Orange
County, CA
THE ORANGE COUNTY OFFICE MARKET
has been hit hard by the implosion of
the subprime mortgage finance industry.
Bankruptcies and significant layoffs led
to a loss of 5,500 jobs in the finance and
insurance markets last year, Grubb &
Ellis reports. Further, local unemployment increased to 4.2% in the fourth
