L.A., OC See Increase in Environmental Site Assessments

There has been an increase in environmental site assessments nationwide. According to data from LightBox, phase 1 site assessments are up 8% for the first quarter, and Los Angeles and Orange County are both ranked among the top markets for site assessment activity. Phase 1 assessments are typically a precursor to CRE transaction activity, and could be an indicator of increasing sales volumes on the horizon.

“Unlike the Great Financial Crisis, which was a credit shock to commercial real estate, the current downturn was triggered by a health crisis,” Dianne Crocker, principal analyst at LightBox, tells GlobeSt.com. “As metros across the U.S. reopen and dealmaking gets back underway, metros like L.A. and Orange County that had strong fundamentals earlier this year are expected to recover faster than weaker metros with less robust interest from investors.”

However, Crocker says that the pandemic certainly hurt deal volumes in the last three months. “The 1Q Snapshot Report highlights Los Angeles and Orange County as two of five primary metros that, through the January through March quarter, sustained eight full quarters of growth in environmental due diligence activity that was above U.S. averages,” she adds. “As the COVID-19 pandemic took hold in mid-March, it adversely impacted deal making in April and May.”

Still, property due diligence continued to outperform 2019 numbers in March of this year before falling in April and May. However, Los Angeles and Orange County continued to outperform the greater market. “In April and May 2020 COVID-19 impacts were reflected in volume that fell 38% in the L.A.-Orange County metro area compared to the same time period of 2019, compared to the 44% decline across all 54 primary metros modeled in ScoreKeeper,” says Crocker.

Overall, the LightBox report shows an bigger increase in environmental assessments in secondary markets compared to primary metros. In fact, Los Angeles and Orange County are the standout primary markets on the list. “Early in the market’s recovery from the Great Financial Crisis, investors tended to focus on the largest markets like New York City, Los Angeles, San Francisco and others,” says Crocker. “As this protracted recovery has played out and property prices rose higher and higher in the primary markets, investors increasingly turned their focus to smaller metros with less robust competition and more opportunity to realize a return on investment. That is not to say that primary metros like Los Angeles, Orange County and others in our analysis are not outperforming averages for other primary markets, but that investors were willing to go further out on the risk curve than previously to look at opportunities in smaller metros like Austin, Cincinnati and Providence.”

In addition, Crocker adds that redevelopment and population growth are among the top characteristics continuing to drive capital to primary markets. “Factors that bode well for the primary metros in our analysis (Portland, LA, Baltimore, San Diego and Orange County) are a strong focus on the redevelopment of properties, higher than average population growth, a strong tech presence, and demand for industrial/warehouse space to support e-commerce trends,” she says.