MARKET HIGHLIGHT, MAY 2011

LOS ANGELES
Robert Leveen, Timothy Macker, Becky Blair and John Eddy

While development is sparse, there are big exceptions in the big city. Meanwhile, statistics indicate market stabilization.

Multifamily

2011 is shaping up to be very transitional in the Los Angeles multifamily market.  2010 saw a dramatic increase in transactions versus 2009. And thanks to the low interest rate environment and lenders beginning to increase leverage, the view here is that velocity will continue to increase and deals will be getting done. 

The economy continues gaining traction, and while there may be very little rent growth, concessions are starting to burn off, and vacancy is on the decline. Specifics point to various markets like west Los Angeles, which has always been strong for young college graduates and new families. At the height of the recession, this submarket saw vacancies increase to 10 percent, with asking rents dropping at times almost 20 percent according to some clients, which operate small- to- mid-size Class B product in the submarket. Many tenants coupled up, and some young singles moved back home with parents. As has been echoed by many prominent analysts, the uncoupling of families and roommates is helping drive occupancy.

The recession has bottomed out, and consumer spending has been on the rise the past 4 months. Global events and demand are driving the increase in fuel and food costs, which may lead to weakness later in the year.

Surveys indicate that the South Bay area is leading the way with positive net absorption and a 5.9 percent increase in average rents to $1,637 per month in 2010. West Los Angeles rents increased 1 percent to $2,110 per month; while the Tri Cities area (Burbank, Glendale, Pasadena) had a 9.2 percent decline in rents to $1,522 per month. Downtown L.A. experienced negative net absorption of 4 percent, however average rents rose 6.8 percent to $1,767 per month. Hollywood’s negative net absorption was 1.4 percent, and average rents rose only 0.6 percent to $1,629 per month. Finally, the San Fernando Valley saw only slight positive absorption, with a 2.7 percent increase on average rents to $1,387 per month.

On the development side, more than 5,200 units were completed in 2010. Only 2,175 units are scheduled to come on-line in 2011. That is reflective of the recession and available debt; anticipate that the annual addition of new units to the market will trend back to the 5,000 level. Some of the prominent developers that will deliver product this year include G.H. Palmer Associates with the 335-unit Piero II downtown; The Avenue, a 180-unit development in Hollywood by Resmark Equity Partners; and IMT Residential delivering 144 units in Valley Village on the former Stevenson Nursery site.

A bifurcated market persists where Class A and B product will trade at historical low cap rates, while Class C and distressed deals are attracting only the investors who are able to realize year one yields of 14 percent or more. Expect to see increased foreclosure activity that will bring more product to market, but there should be no downward pressure on values as a result. Conversely, there should be increased competition for the product.

— Robert Leveen is senior vice president/principal in Lee & Associates’ Investment Services Group.

Office

A stalled economy, while gradually improving, has hamstrung new development in the greater Los Angeles office market. However, stabilization is anticipated later this year with the expectation that rents will gradually begin increasing in 2012.

No one is aggressively making loans for new office development today unless there are pre-commitments. Additionally, there is a surplus on the inventory side, so there’s no justification for new construction.

Downtown Los Angeles may be the lone exception underlined by AEG Worldwide’s proposed $1 billion football stadium and multipurpose arena to be built adjacent to L.A. Live.  Elsewhere, The Ratkovich Company’s proposed transformation of the former “Spruce Goose” property in the Playa Vista area of west Los Angeles is another major initiative.

In the leasing sector, there is increased absorption for office space and other property types across the board. Rents and concessions are stabilizing; lease rate are even recovering, sparking a lowering vacancy factor.

There is also increased activity in the investment arena, due primarily to a recognition that valuations are bottoming in all sectors. There’s a lot of money on the sidelines and a good array of product available. Concurrently, yields are more attractive than they were 1, 2 and 3 years ago.

Vacancies for office, as well as retail, space in Los Angeles are trending downward, but at a pace slower than owners and investors would like, though tenants are clearly benefiting.

Hotter submarkets have historically been the ones with higher income demographics. In greater Los Angeles, this means areas such as Santa Monica, Beverly Hills and Pasadena. Investors continue to be attracted to properties in these communities, typically for redevelopment of older properties. Additionally, certain ethnic neighborhoods are primed for new development and investment. In Los Angeles, this typically means Asian enclaves such as Koreatown. There’s a significant linkage between monies coming from abroad to Los Angeles, which is perceived as a strong area for investment.

On the leasing front. Los Angeles is benefiting from companies headquartered elsewhere, notably Northern California. Google recently leased 100,000 square feet of space in Venice, while Facebook leased significant space in nearby Playa Vista.

In other noteworthy activity, Agensys, a cancer research company, is doing a build-to-suit in Santa Monica for 160,000 square feet of space. These companies increasingly recognize the value of a large skilled labor pool in the market and relatively affordable real estate values. Additionally, Champion Development recently closed escrow in Hollywood where it will build a $100 million transportation-oriented mixed-use project.

For the balance of 2011, one should see the owners’ perspective being marked by further stabilization of rates and concessions and less “blood letting.” Office rents are stabilizing across the board (including concessions/discounting): $21 to $37 per square foot, per annum. Rents range from the highest rates (west Los Angeles) to other suburban locations where tertiary markets are commanding less than $2 per square foot per month. Tenants will still enjoy low rental rates for the balance of the year, so they should be well served by locking up lease rates. The expectation is that rental rates will begin increasing later this year.

The overall office vacancy rate in greater Los Angeles is 12.5 percent; west L.A. and the South Bay both record a 13.7 percent vacancy, downtown L.A. 10.7 percent and the San Fernando Valley is at 15 percent.

— Timothy Macker is a principal at Coldwell Banker Commercial Blair WESTMAC.

Retail

Retail vacancies in the greater Long Beach/South Bay area of metro Los Angeles continue to increase as underlined by the closing of two Border’s Books & Music stores, bringing 100,000 square feet of space to the market in the east side and downtown areas of Long Beach. Just weeks ago, in the prime downtown Pine Avenue area of Long Beach, AMC Theatres shuttered a 16-theatre complex, while Z Galleries also called it quits. In some areas, landlords are dropping rent as low as $1 per square foot for short-term leases, and tenants are also receiving free rent and build-out allowances. On the positive side, smaller “mom and pop” businesses are replacing some of the small space vacancies and are doing well.

Concurrently, three significant government developments are bringing promise to the area. The new 551,000-square-foot Long Beach County Courthouse project will break ground in just weeks. Located at Magnolia and Broadway in the downtown area, the $395 million project is being built by Long Beach Judicial Partners. It will house 800 workers and attract more than 4,000 visitors per day.

Perhaps the largest single government project to be developed in the past decade is the replacement of the Gerald Desmond Bridge. Scheduled to start in fourth quarter, the $950 million project will lead to the hiring of 4,000 workers. Another notable development is the modernization of the bustling Long Beach Airport, a $136 million renovation that will include expansion of the current terminal and a new 1,989-stall parking garage. The project will provide more than 800 jobs from start to finish, welcome news for owners in the nearby Douglas Park development. There, Mar Ventures is partnering with Comstock Crosser & Associates and Continental Development to purchase a 26-acre retail site in the center portion of Douglas Park for new development.

Another upbeat sign for the retail market is the development of South Bay Marketplace next to the South Bay Galleria in Redondo Beach. A grand opening for one of the tenants, Total Wine, was scheduled for the end of April. According to listing agent, Ted Lawson of CB Richard Ellis, the majority of the 117,000 square feet is either leased or being negotiated. Other tenants include a 37,000-square-foot Nordstrom Rack, Sprouts Farmers Market, Ulta Cosmetics and Islands Restaurant.

Retail rental rates in the greater Long Beach/South Bay market range from $1.50 to $3 per square foot, with lower rates for second-generation market space and the highest rents for newer suburban locations. Meanwhile, the overall vacancy in the Long Beach/South Bay L.A. area hovers around 4.1 percent. This compares to 4.5 percent a year ago.

— Becky Blair is a principal at Coldwell Banker Commercial Blair WESTMAC.

Industrial

While leasing and investment have been lagging, and new development is virtually non-existent in the greater Long Beach industrial market, activity is definitely increasing. Owner/user purchases constitute the lone bright spot and the most prominent trend in the market. In Rancho Dominguez in March, F.C.C. Logistics’ $5 million purchase of a 71,360-square-foot industrial facility was a significant South Bay transaction of this kind. Sparking the owner/user acquisition trend are low property valuations, low interest rates and the availability of SBA financing. A prime example is a local auto-parts aftermarket company, which is currently in escrow for 19,000 square feet of space in north Long Beach.

Though new development has been absent, value-added projects featuring the renovation of existing facilities are happening. One significant new project on the horizon is a 200,000-square-foot distribution building that will be built by Alere Property Group LLC on 12.4 acres in Long Beach.

In the investment sector, there are many investors looking, but few deals have gone down in the past year. The reason is that most owners are unwilling to sell at today’s prices, particularly on quality product. There is a substantial amount of money sitting on the sidelines for industrial property purchases. The problem is that investors don’t believe the market has hit bottom yet. In Carson, Calif., a 78,486-square-foot industrial warehouse was acquired by the Soderstrom Family Trust for $8.6 million.

 Leasing activity, meanwhile, is up from 2009 with slight increases over 2010. This increase is explained by the fact that property owners are tiring of seeing their buildings empty and want them leased. They are adapting to market realities. Depending on building size, rental rates range from $0.40 per square foot to $0.60 per square foot for buildings from 10,000 to 100,000 square feet. This is down from a year ago.

The strongest submarket is Signal Hill, an independent municipality right in the heart of Long Beach. Business friendly with low license fees, Signal Hill has maintained a strong occupancy level.

Although the overall industrial market in Long Beach is down from previous years, it has not been hammered like other outlying L.A. metro submarkets. This is largely explained by the increasing activity at the Port of Long Beach. The view here is that no significant changes will be evident for the industrial market for the balance of 2011. The market has definitely warmed, but it’s probably a year away from any significant upturn.

— John Eddy is a senior vice president at Coldwell Banker Commercial Blair WESTMAC.

©2011 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.