What Can SoCal Learn From Past Recessions?
The Dot Com Bubble and the 2008 Financial Crisis could inform the damage to come and the recovery in the current dislocation.
According to research from JLL, the Los Angeles office market outperformed Orange County and the national market in the last two recessions. Los Angeles’ office market had an average 11% peak-to-trough decline between the last two recessions, while Orange County had a 22.3% peak-to-trough decline. By comparison, the US office market declined 13% peak-to-trough. Los Angeles also recovered faster, reaching pre-recession rents in 5.3 years, while Orange County took 7.5 years to reach peak rents again. This data could prove useful in predicting office activity patterns during a downturn.
“What caused this recession is unprecedented, but once we slide into the mechanics of a recession, which we really won’t feel until you see formulated layoffs, there will be similarities to prior recessions,” Peter Belisle, market director for the Southwest region at JLL, tells GlobeSt.com. “For Southern California, the good news is there is stronger economic diversification than we had in both the previous recessions.”
Diversification is the theme. Los Angeles performed better in the last two recessions because it has a bigger mix of job-providing industries. In the early 2000 Dot Com crisis, the recession impacted the technology market, and in 2008, financial services firms took the hit. Markets with multiple job pools could mitigate economic loss. “Los Angeles felt an impact on both of them, and it felt an impact across a lot of industries,” says Belisle. “However, the diversification of economies helped. Orange County doesn’t have the level of diversification that Los Angeles has, and that is a reason for the delta. Los Angeles is a more mature and larger marketplace.”
However, Los Angeles and Orange County had similar increases in vacancy rate. Los Angeles vacancy increased 600 basis points on average over the last two recessions and Orange County saw an only slight higher 690 basis point increase in office vacancy.
Now, Orange County is achieving more market diversity, which will help hedge against the downside in the next recession. “Orange County is just starting to come on the scene with technology companies,” says Belisle. “That is becoming more of a driver, and the market has moved away from being so financial-services centric, which is healthy. That is a good sign for where Orange County is headed.”
Overall, the Southern California region is well positioned to weather the storm, and Orange County in particular will perform better than it has in the past. “I don’t think that it will be as severe as the previous recessions. The diversification that has occurred in both markets since 2009 has been tremendous,” says Belisle. “In Orange County, technology companies have seen growth in the market, and that is going to help Orange County in particular come out of a recession faster than they had in the previous two.”