SoCal Outlook for 2008 Calls for Steady, but Slower Growth

With the new year just around the corner, it’s that time when some of the leading industry organizations offer their outlook for the coming 12 months. One of the top commercial real estate institutions in Southern California is the University of Southern California Lusk Center for Real Estate, which sponsors the annual Casden Real Estate Economics Forecast. The group just released its 2007 Southern California Office and Industrial Market Report, which predicts that the outlook for Southern California office and industrial markets in 2008 is generally positive with slower but steady growth, tempered by caution flags.

“When looking towards next year, you have to balance the surging demand for West LA office space, the financial services fallout in Orange County and the massive amount of industrial space under construction in the Inland Empire,” said Delores Conway, Ph.D., Director of the Casden Real Estate Economics Forecast, at a briefing for real estate executives in Los Angeles. “Our region faces challenges from the housing slowdown, but we benefit from increased foreign trade, wage growth, and a diversified and resilient economy,” she explained.

LA County’s job growth in professional, health, and leisure services should fuel a continuing demand for office and warehouse space. In Orange County, layoffs in the financial services and mortgage industries will keep vacancies high for awhile. “But the diverse economy and skilled workforce should make this a short-term adjustment,” Conway explained. Across the Inland Empire, new office buildings and mega-warehouses are under construction despite a slumping housing market. The area’s global identity as a premier distribution center will keep it at the top of all U.S. industrial markets in 2008.

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, who sponsored the forecast along with Equastone, Maguire Properties, California Real Estate Journal, Rexford Industrial and Stroock, Stroock & Lavan. The following summarizes key findings in the current Casden Forecast:

Los Angeles County Forecast

Stunning Westside rent increases of 34 percent in 2007 have initiated some split offices, with executive staff staying on the Westside and administrative staff moving to the South Bay or the San Fernando Valley. Downtown Los Angeles is generating new office space demand and higher rents with the opening of the Nokia Theater and the build-out of LA Live! Farther north in Calabasas, significant sublease space from the downsizing at Countrywide and Amgen along with new construction is pushing vacancy rates up. But landlords are holding firm on rents since office space is more affordable than West LA. Los Angeles County will remain the tightest industrial market in the nation due to strong demand from international trade. Some industrial space may open up as the housing downturn slows the conversion of manufacturing and warehouse sites into residential uses.

Orange County Forecast

A surge in sublease office space from layoffs related to the subprime loan crisis is pressuring the market with higher vacancies. This is expected to be a short- term adjustment since office rents continue to rise. Landlords may hold rents firm, due to the skilled labor force and entrepreneurial activity that attracts companies from outside the area. Proximity to the Ports of Long Beach and Los Angeles should keep the industrial market healthy. Sales activity will be slower in 2008, but should pick up as foreign investors are attracted by the weak U.S. dollar and well-capitalized pension funds see buying opportunities.

Inland Empire Forecast

Despite the current housing slump, the Inland Empire should remain the nation’s top industrial market as international trade and cheap, available land lure warehouse developers. Larger speculative facilities along Interstate 215 will take longer to lease as rising fuel prices add to the cost of travel from the LA/Long Beach ports. The area’s office market should remain competitive with surrounding counties due to affordable rents and newly completed space. The Ontario Airport submarket continues to be a hub of office activity. The Riverside submarket accounts for more than half of all office construction in the Inland Empire and vacancy rates will fluctuate as new buildings come online next year.

To learn how you can obtain a complete copy of the Casden Real Estate Economics Forecast and the Office & Industrial Market Report, contact the USC Lusk Center at (213) 740-5000 or email: lusk@marshall.usc.edu

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