The report by Christopher F. Thornberg, senior economist with the UCLA Anderson Forecast, says the concern with residential real estate is that, if mortgage rates rise as expected in late 2003 and through 2004, and if housing prices continue to rise at a double-digit yearly percentage, "the region may very well see unsustainable prices being paid for properties, and this could lead to difficulties for homeowners down the line." The forecast says the Southern California commercial real estate markets remain "stable, and very positive relative to the rest of the nation."

Thornberg's report notes office space vacancy rates for LA continued to edge up throughout 2002, coming close to 15% in the fourth quarter, and Orange County office vacancy rate have surpassed 15%. But he adds, "One of the traditionally worst office markets in California, here in LA, has become the best in recent months as other parts of the state, particularly Northern California, suffer significantly higher office vacancy rates."

The outlook describes the Inland Empire as one of the strongest commercial markets in the region, in large part due to the continued strong employment growth there. For industrial space throughout Southern California, "things look much stronger than they do for the office markets," according to the forecast. "In fact, it seems highly likely that the industrial and retail side of commercial development will be the only areas of non-residential construction that will be driving the market forward," Thornberg's forecast says.

Among the soft sectors of the local economy are traffic through LAX, hotel vacancy rates, employment in export sectors such as manufacturing, motion picture and music production, and wholesale trade. Yet the health care, retail trade and professional services sectors all remain strong, the report says. "When the US gets back on track later this year," the study concludes, "we expect the Southern California region to lead the economy in job growth and construction.