With constant population growth and robust consumer demand in the area, Los Angeles’ retail market continues to receive a lot of attention from investors. Sound market fundamentals, coupled with the recent measured pace of retail development, have driven real estate prices higher but there’s an abundance of available capital to match. Similarly, L.A.’s multifamily sector continues to thrive with demand for housing outdistancing supply. As the year continues, investors will eagerly monitor the stock market and interest rates to gauge apartment values. Los Angeles County’s industrial market led the nation in investment sales volume and absorption in 2003. The area’s industrial performance should remain strong as smaller industrial properties with freeway access, especially in the Long Beach submarket, become the hottest comodity. Los Angeles’ office market remains flat. Vacancy rates on the west side fell last year but so did asking rates across all submarkets. The dissipation of large blocks of sublease space augurs well for the office sector though as industry experts await further signs of job growth.

Retail

With a population growing by more than 100,000 people annually and soaring home values helping to boost retail sales, Los Angeles shines with a retail market exhibiting strong investment activity and high prices. An abundance of available capital provides the means for investing in retail properties, and strong fundamentals will continue to justify the high prices being paid. Investors looking for solid investments will find local retail properties still churning out returns greater than bonds. Many investors have been vigorously pursuing local retail properties in the last year as they seek to capitalize on one of the strongest retail markets in the nation.

Concerns about the economy have slowed retail development from the rapid pace of the past few years, but pronounced consumer spending levels and the return of job growth should spur activity in the coming years. Developers taking advantage of reuse laws are incorporating retail into their residential projects. During 2003, developers delivered approximately 3.9 million square feet of retail space, consisting mostly of single-tenant properties. Only 750,000 of the 3 million square feet expected this year will be composed of shopping centers. Downtown, retail developers will add only 350,000 square feet. Only two projects, totaling 265,000 square feet, are slated for the west side of Los Angeles in 2004. Finally, builders will deliver just 200,000 square feet of new retail space in the San Fernando Valley this year.

The declining number of national retail chains may challenge local shopping centers, but the improved retail climate should keep absorption positive in 2004. Owners of neighborhood and community centers can expect vacancy to drop 20 basis points, to 4.6 percent, for the year. Downtown, the completion of the Disney Concert Hall and the soon to be finished Grand Avenue project should transform the submarket into a shopping destination. Net absorption is positive, and the vacancy rate should decline by 30 basis points, to 4.9 percent, during 2004. On the west side, vacancy ended 2003 at 6.6 percent but should drop to 6.1 percent this year as retailer interest in the area remains strong. Leasing activity in the Valley is showing encouraging signs, and the South Bay area has consistently posted low vacancy rates.

The rebounding economy and continued rise in retail sales will allow shopping center owners to achieve a modest increase in asking rents in 2004. Owners saw a 4 percent annual increase in rents, to $1.93 per square foot, in 2003. Most of the region’s gain came from neighborhood shopping centers, where rents should rise further in 2004. Downtown redevelopment will allow owners to boost rents there by 3 percent this year, to $2.34 per square foot. In the west side cities, rents are also expected to grow, by 4 percent in 2004. Owners in the Valley can expect an increase of 3 percent this year.

Prices for retail investments increased dramatically during 2003, with single-tenant properties garnering the most interest and the median price increasing by 11 percent to $210 per square foot. Shopping centers also generated substantial activity in 2003 with prices rising by 10 percent to $149 per square foot. Investors will continue driving up prices in the downtown area. The median price for shopping centers rose from $104 per square foot in 2002 to $185 per square foot in 2003. Last year, shopping centers on the west side increased in value by 13 percent to $225 per square foot and should increase another 5 percent in 2004. The median price for shopping centers in the Valley shot up 15 percent in 2003 while prices for single-tenant properties jumped 43 percent to $220 per square foot.

— Lane Schwartz is the regional manager at Marcus & Millichap’s Los Angeles office.

Multifamily

The lack of inventory for multifamily product continues to drive prices upward. In addition, multifamily sellers continue to accept unsolicited offers from buyers, usually leaving money on the table, and forcing them into a 1031 exchange with little or no help from the agents that sold their property. The feeding frenzy has reached a point where short term owners, who may have added some value through rehab and rent increases, have the opportunity to flip deals to individuals boxed into 1031 exchanges.

As we progress through the first half of 2004, the lack of available housing will continue to support rents and the price investors are willing to pay for multifamily properties. On the other hand, renewed interest in the stock market and the potential for rising interest rates will be the determining factor in regards to real estate values this year and beyond.

In the Los Angeles market, multifamily development has been, and will continue to be, the hottest investment opportunity. For example, Meta Housing just received $47 million of bond financing for the development of a 263-unit apartment complex at 2nd and Lucas in downtown Los Angeles. The company also intends to build an additional 80-plus units adjacent to that project. These two developments, combined with ADI’s project on Lucas, will change the face of the neighborhood, which hasn’t seen any real changes in 60 years.

Even though a number of development projects are on the drawing board in the downtown area and conversion of old office buildings continues, demand for multifamily product is still greater than supply. This demand is generated by individuals and families working in downtown Los Angeles with an additional push coming from students and other people living outside the area. The more multifamily product developers bring on line downtown, the more interesting downtown L.A. will become.

New to downtown, but not to multifamily development, is Phillip Ram of West Millennium Homes, who has been building condominiums on the west side of the city for years. The company’s projects include developments in Trancus Beach, near Pepperdine and Playa Vista. West Millennium will now venture into downtown L.A. with a conversion project on 7th and Grand.

Like development, investment activity for the apartment market is extremely hot. Los Angeles multifamily investors are benefiting from population and job growth, lower vacancy rates, declining permits and a persistent supply/demand imbalance. From an investment standpoint, there are certainly some submarkets that have outpaced others. Vacancy rates have increased on the west side and in other areas that have relatively high rents. This has and will continue to spark the interest of developers in downtown and in the mid-Wilshire area.

As interest rates increase, fewer families will be looking to buy homes, thereby renewing their interest in luxury apartments. Interest rates, combined with a strengthening economy and high housing costs, will continue to support the apartment market in Los Angeles.

— Al Shilton is senior managing director of investment real estate at Charles Dunn Company’s West Los Angeles office.

Industrial

Los Angeles County was the strongest industrial market in the United States in 2003, leading the country in investment sales volume as well as absorption. In fact, when combined with the Inland Empire of Southern California — Riverside and San Bernardino counties — the tri-county area represents 62 percent of the industrial space absorbed in America in 2003.

As 2004 gains momentum, Los Angeles County industrial product should maintain strong absorption with continued strong velocity in sales, a 50 to 75 basis-point improvement in cap rates, increased institutional interest, and continued owner-occupied and user demand.

The ongoing industrial trend in Los Angeles will continue to be the private investor market. If interest rates remain low, there appears to be no end in buyer demand for industrial product. Construction has been heavily oriented to the owner/user, and pre-leased projects and speculative construction of industrial product in Los Angeles are not significant as a percentage of the total stock.

Any development or repositioning of properties continues to seek out locations with freeway access for the obvious reasons of distribution and manufacturing. The 405, 5, 110, 605 and 91 corridors receive a lot of attention from both investors and users. The repositioning of infill assets will be the only long-term option due to the scarcity of land for new development, a trend intensified by zoning and permitted land use constraints.

Los Angeles is a key artery for the flow of off-shore manufactured goods to the rest of the nation, with some manufacturing and significant distribution operations still leading the charge in activity. The port of Long Beach/Los Angeles continues to fuel the area.

The leasing market remains tight, and typically only smaller industrial facilities are available. Los Angeles County’s sale-versus-lease performance is significant — in deals exceeding $1 million in value (through November 2003), the area has registered $1.63 billion in sales volume in 420 transactions involving 23,986,791 square feet at an average of $67.87 per square foot.

The Long Beach submarket will be the one to watch in Los Angeles County. All signs indicate that it is undervalued in nearly all of the industrial product types compared to other Southern California coastal regions. Significant profit potential exists there for current owners, and the demand generators and redevelopment movement in Long Beach will add value for the buyer’s long term. In other words, the stars are aligned for investors.

Industrial real estate continues to be a significant product of choice in the current top markets of Southern California due to its comparative low price per foot, low rent per foot, scarcity in new construction, strong occupancy and absorption, and quality of tenants from a management perspective.

— John P. McDermott is the national director of office and industrial properties for Sperry Van Ness in Irvine, California.

Office

The collective sigh you heard as 2003 drew to a close was from brokers and landlords alike. After four consecutive quarters of positive leasing, the West Los Angeles office market sits with the lowest vacancies it has had in nearly 2 years. No matter which side of the table you sit on, that’s the best news to come out of the sector in a while.

A couple of large deals lead the way. Electronic Arts Inc. signed a 10-year lease for 245,000 square feet at Phase One of the Waters Edge in Playa Vista; HBO inked a 15-year, 110,000-square-foot deal at Tishman Speyer’s Colorado Center for their West Coast headquarters; and Santa Monica-based advertising agency Rubin Postaer closed on a 125,000-square-foot lease earlier in 2003 in that same project.

Despite the Electronic Arts transaction, it does appear that the majority of the deals signed in 2003 were tenants moving laterally from building to building, submarket to submarket, gobbling up large blocks of space and leaving equally large holes in their wake — they essentially traded space. The result is very little net growth or absorption.

One piece of good news is that the large blocks of sublease space that dogged the west side market over the last 2 years have, for the most part, receded from view. Much of this space, left over from the excesses of the dot-com craze, has either found subtenants to fill the void or has reverted back to the landlords for direct marketing. In the past, these subleases have created a great deal of negative pressure on asking rents from West L.A. landlords. During the last 10 quarters, asking rates across almost all submarkets have continued to fall. In some submarkets, such as El Segundo, Century City and Santa Monica, rates have fallen by as much as 30 percent in that timeframe. If there is any good news to take away from this, it is that both rates and concessions to new tenants seemed to have stabilized in the last several months, with current Class A asking rates at $2.75, down 2 cents from the prior month.

New construction, or rather the lack thereof, has also helped to buoy the market during the recent rough times and will more than likely play a significant role in the recovery of the markets in the future. Unlike past down cycles caused by oversupply of office space due to new construction, this cycle in large part has been caused by a lack of continued demand from office tenants persevering through a lackluster economy. These demand-related cycles tend to be shorter in duration than supply-based shifts and should bode well as 2004 progresses. One submarket exception to the lack of new construction of office space is Century City. On the heels of the opening of a 750,000-square-foot Class A office tower, which Chicago-based JMB Urban completed in June 2003, Creative Artists Agency is reportedly on the verge of signing a lease for 150,000 to 180,000 square feet of office space at the proposed 2000 Avenue of the Stars site. If the lease is executed, Trammell Crow will begin construction on the proposed development for owner JP Morgan Chase & Co. The $280 million development and buildout, which is to be located on the site once held by ABC Entertainment, will consist of 15 floors and 790,000 square feet and will have a 2006 completion date.

All in all, the West Los Angeles office market had a notable 2003 for a couple of reasons. First, rental rates, though falling, appeared to have found some stability. Also, the overall increase in landlord concessions seems to have abated as office owners completed some of the deals needed to preserve cash flow. Large blocks of direct and sublease space have dwindled considerably and construction starts have been limited. All we need now in 2004 is a little increase in demand stirred by a growing economy.

— John Ollen is the regional leasing director for Tishman Speyer Properties in Los Angeles.


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