USC Forecasts Continued Commercial Slump

The indicators point to persistent high vacancy rates and weaker office demand through the end of next year, according to the forecast. But it's an ill wind that blows no good, as the forecast points out in its assessment of how the changing economic and real estate realities are affecting various players in the commercial real estate markets.

For example, with vacancies rising and rents declining, "The pendulum has swung from landlords to tenants for the first time since 2003 as an abundance of office space and reduced demand is putting pressure on rents across the region," director Delores Conway of the Casden Real Estate Economics Forecast says. As a result, Conway says, "Credit-worthy tenants should be able to renegotiate leases to their advantage," and all-cash buyers will find well-priced properties in prime locations.

In Los Angeles County, companies are reevaluating their needs for office space in light of rising unemployment, but limited office construction in recent years tempered the rise in vacancies, the forecast notes. Rental rates are under pressure from the large volume of office sublease space, and industrial vacancy rates moved higher, but are still very low and "Rents should stabilize in the near term," Conway's forecast shows.

In Orange County, where the subprime mortgage industry collapse hit especially hard, high office vacancy rates and a large volume of sublease space will continue. Minimal new construction should help vacancies level off toward the end of 2009, according to the forecast, which expects industrial vacancy rates to remain at about 5% with stable rents and softening demand.

Conway cautions that any forecast for next year's office and industrial markets must be tempered by the economic recession and tight commercial credit conditions. "The full depth of the financial crisis remains to be seen as companies struggle to meet their payroll while paying the rent or mortgage," she says. "There is considerable uncertainty in the region's economic outlook until the credit markets begin functioning normally again."

In the Inland Empire, "Abundant new office buildings are still attracting tenants from healthcare, but it will take time for that space to be absorbed," the forecast states. Rising vacancy rates will persist due to high unemployment, but the trade-based submarkets near Ontario Airport should recover more quickly than the rest of the region, it says. The region's industrial development "will take a break with the slowing global economy," according to the forecast, which notes that some eastern submarkets of the Inland Empire face large amounts of new supply and softening demand. But with slower leasing and sales activity, developers are continuing to hold off on new projects and rents should stabilize around current levels.

The annual Casden Real Estate Economics Forecast analyzes economic data on rents, vacancies, transactions, and employment for office and industrial markets in Los Angeles, Orange, Riverside and San Bernardino counties. The market data was supplied by Grubb & Ellis.