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Commercial real estate is becoming a buyers market in the Southland as a sour economy is causing more business closures and office vacancies, according to a USC report issued last week. With the country facing one of the worst recessions in decades, office and industrial properties across Southern California will continue to feel the effects of business closures and slower global trade well into 2009, according to the 2008 Southern California Office and Industrial Market Report released by the Casden Forecast at the USC Lusk Center for Real Estate
"The pendulum has swung from landlords to tenants for the first time since 2003 as an abundance of office space and reduced demand is putting pressure on rents across the region. The indicators point to persistent high vacancy rates and weaker office demand through the end of next year," said Delores Conway, director of the Casden Real Estate Economics Forecast, at a briefing for real estate executives in Los Angeles.
"Credit-worthy tenants should be able to renegotiate leases to their advantage," she added. Conway cautioned that any forecast for next year's office and industrial markets must be tempered by the economic recession and tight commercial credit conditions.
"The full depth of the financial crisis remains to be seen as companies struggle to meet their payroll while paying the rent or mortgage. There is considerable uncertainty in the region's economic outlook until the credit markets begin functioning normally again," she said.
According to the report, the large amount of sublease space in Los Angeles County will put downward pressure on rents next year, and rising unemployment is causing companies to reevaluate their needs for office space. While the economic downturn hit the Los Angeles office markets hard this year, limited office construction in recent years tempered the rise in vacancies. Rental rates are under pressure due to large amounts of office space available for sublease.
Industrial vacancy rates have moved higher but are still very low and rents should stabilize in the near term, according to the USC report. In Orange County, 16 percent vacancy rates are expected to continue next year due to the large amount of office space for sublease from stressed financial firms. Minimal new construction should help vacancies level off toward the end of 2009.
The credit crunch presents opportunities for all-cash buyers and credit worthy tenants. Industrial vacancy rates are expected to remain around 5 percent with stable rents due to softening demand. Office vacancies also will remain high in the Inland Empire as the unemployment rate outpaces the rest of the country, although long-term demand for large distribution space is likely to eventually overcome market headwinds.
Abundant new office buildings are still attracting tenants from healthcare, but it will take time for that space to be absorbed, the USC report said. Elevated vacancy rates will persist due to high unemployment, but the trade-based sub-markets near Ontario Airport should recover more quickly than the rest of the region, it said.
"The area's feverish industrial development will take a break with the slowing global economy," according to the report.
The annual Casden Real Estate Economics Forecast analyzes economic data on rents, vacancies, transactions and employment for office and industrial markets in Los Angeles, Orange, Riverside and San Bernardino counties. The market data was supplied by Grubb & Ellis. Copies of the report can be obtained for $75 by calling the USC LuskCenter at (213) 740-5000 or on the Web at www.usc.edu/casden.