The cloud of distress is slowly dissipating over SouthernCalifornia's sunny skies, although some areas of concern stillpresent challenges to real estate owners. The supply-constrainedapartment sector and flourishing industrial property market presentthe least challenges to owners and financiers, while some retailand office assets, particularly in the Inland Empire and OrangeCounty, have bigger hurdles to overcome. While these distressedassets present challenges to current owners and banks, they alsopresent opportunities to buy properties at deep discounts.

While the US multifamily sector continues to see the highestrate of distress among the four major product groups, in dense andsupply-constrained Southern California, the market has been thebest performer and continues to exhibit the lowest levels ofdistress. Among the four major metro areas in SoCal, the InlandEmpire has the highest multifamily vacancy rate, at slightly above5%, with San Diego exhibiting a low 3.2% vacancy. The extremelytight rental market has resulted in significant rental growth overthe past 12 months, which has helped many properties that wereteetering on the verge on delinquency improve their fundamentalsand move their loan status to performing.

While there are few delinquent assets for investors in Orangeand San Diego counties, opportunities exist in the Inland Empireand Los Angeles, where the increased sprawl, condo conversion bustand tepid economic recovery has negatively impacted a greaternumber and scope of multifamily properties. The current delinquencypipeline for these areas shows a strong concentration of assets insevere distress (90 or more days) and a few smaller and mid-sizedproperties in the earlier stages of distress. The continuedimprovement in local multifamily fundamentals will slow themovement of assets into the distressed pipeline, but those alreadyin distress will most probably be taken to market as the lenderslook to capitalize on the active sales market and move theproperties off their balance sheets, especially as multifamilyrecovery rates in Los Angeles remain above 85%.

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