Forecast Sees Slow Return for Coastal Markets

LOS ANGELES-The state’s office market will continue to deteriorate between now and 2011, a forecast says, and tenants will fare well because of that, another says. The Allen Matkins/UCLA Anderson Forecast for California commercial real estate observes that, “In the wake of the recession and the freezing up of financial markets for office space development, developers and investors believe that office markets will worsen between now and 2011.” The tenant outlook comes from UGL Equis, which says that “Until the economy improves, we expect vacancy rates to rise and rental rates to continue to moderate in both Los Angeles and Orange County markets.”

The Allen Matkins/ UCLA Anderson Forecast, which includes the San Francisco East Bay and Silicon Valley office markets in addition to Los Angeles, San Francisco, Orange County and San Diego, concludes that the dynamics in the Los Angeles and San Francisco markets indicate a turning point at the end of 2010. For the Silicon Valley the survey forecasts a turning point in 2011, but the data is less clear for that market than the others, it says.

And, for the balance of the markets covered by the forecast, “The surveys clearly indicate a longer term adjustment process.” The survey polled a panel of California real estate professionals in the office space and investment market, and asked a series of questions on various aspects of the commercial real estate market.

The UGL Equis forecast notes that current data shows Los Angeles and Orange County’s unemployment rates increasing, with the job losses trending upward in both markets since early 2007. Over the past year the number of office-oriented jobs decreased by 5,800 in Los Angeles County and by 19,500 in Orange County, “which would indicate a combined reduction in demand of nearly 4.5 million square feet of office space between the two markets,” the UGL Equis report says.

There are contrasts in the two coastal markets, however. Los Angeles has entered this downturn with low levels of construction, and relatively low vacancy rates, but a construction boom has added millions of square feet in Orange County. Rental rates in Orange County peaked in 3Q 2007 and have been declining since, but only in the second half of 2008 did overall asking rents begin to decline in Los Angeles.

In its tenant outlook, UGL Equis says that until the economy improves, “We expect vacancy rates to rise and rental rates to continue to moderate in both Los Angeles and Orange County markets.” It points out that tenants will be able to take advantage of conditons in which landlords are increasingly willing to negotiate in order to secure occupancy in their buildings and are now offering an array of concessions such as free rent, increased tenant improvement packages, and favorable lease terms.

UGL Equis also points out that landlords who highly leveraged to purchase properties over the past two years are most at risk in the current market. It advises tenants to remain aware of the financial health of their landlords, and review their current leases to assure that protections are in place in the event that landlords run into financial trouble.