The regional total represents approximately 7% of the total value of distressed US commercial properties. Nonetheless, the area ranked only 24th among US markets in terms of the percentage of properties under distress. "Overall, L.A. is not one of the main areas in the country for distressed properties on a percentage basis," observes Dan Fasulo, director of research for Real Capital. "While some of the secondary and tertiary markets have suffered, prime markets in L.A. are still extremely attractive."

The region's troubled asset tally includes 267 properties. While the retail sector accounts for the largest number of properties with 78 assets compared to 58 office assets, 51 industrial assets and 40 apartment assets, on a dollar basis, office is number one at $1.84 billion, followed by retail at $1.81 billion, apartment at $511 million and industrial at $397 million.

Though the published report doesn't break down the general property categories by subcategory, Fasulo tells GlobeSt.com that one of the notable trends is how well the technology sector has performed. "We haven't seen the same type of pullback from that group as we did in '01 and '02, when high-tech companies were giving back space hand over foot," he says. "It's been more the financial firms and mortgage brokers that have been hit."

In Fasulo's opinion, the overall situation would be far worse if the market had experienced the same level of overbuilding during the boom that it did in the run-up to the real estate recession of the late '80s and early '90s. "There were empty buildings all over the place then. We don't have oversupply this time," he says. "We certainly don't have it in central L.A., but even in outlying areas like the Inland Empire, developers have been pretty disciplined."

As a result, he expects the market to recover fairly quickly once the inventory of distressed assets has been cleared. "Los Angeles is well positioned to climb out of this mess rather quickly, much faster than it has coming out of previous recessions," he states. "I think L.A. will be one of the leaders of recovery."

Fasulo does not, however, anticipate a recovery any time soon. "We need to work through this distressed cycle before we get to the other side," he says. "Until those properties get cleaned up from the marketplace, we're not going to get back to normalcy."

At the same time, the Real Capital exec believes Los Angeles will probably be able to clear its backlog earlier than the majority of markets because of its underlying fundamentals. "L.A. has a very attractive supply-demand matrix," he says. "Whenever there's uncertainty in the market, investors start to steer toward core markets. L.A. would certainly fit into the profile of places investors find attractive in a down economy."

Already, he continues, assets that are fairly priced have started to get multiple bids again. "That's new, just in the past three or four weeks," he remarks. "That gives me confidence there is a market out there. It's just a matter of buyers and sellers agreeing on a price. Sellers are going to have to capitulate for things to really break, but I see signs that's happening."

I've heard mortgage brokers are starting to hire again, just in the last few weeks.What's missing is the oversupply of commercial property. That's what makes this downturn different.We don't have oversupply this time. We certainly don't have it in central LA. That lends me to believe that when the market does start picking up, it has potential to pick up

Instant Insights /

L.A. Distressed Totals at Nearly $7B

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