Outlook Expects Market to Drag from Job Losses

The job losses, which are one of the primary forces weakening the region's office market, are one of a number of factors affecting the overall L.A. Basin economy, according to the report. Another factor is that traffic through the ports of Los Angeles and Long Beach has been slowing from its peak years of 2006 and 2007, declining by 16.1% to 2.1 million units ofcontainer traffic through April 2009 at the Port of Los Angeles and decreasing 28.8% to 1.5 million units at the Port of Long Beach. The declines end more than two decades of steady growth in port traffic, the Delta report notes.

Despite the job losses, Los Angeles County continued to maintain one of the lowest office vacancy rates in the nation at the second quarter of 2009, although the rate has risen steadily since the end of 2007, Delta points out. In addition, as L.A. County is shedding jobs, demand for office space is sliding and rental rates are declining.

Net absorption of office space totaled negative 1.6million SF in LA County in the 2nd quarter of 2009 andnegative 5.6 million SF year-to-date. This compares tonegative 2.9 million SF in all of 2008.Despite its relative strength compared with some markets, L.A. County still posted negative net absorption of 1.6 million square feet in the second quarter of 2009 and negative 5.6 million square feet year-to-date. This compares to negative 2.9 million in all of 2008. The county's overall vacancy rate increased to 11.5% in the second quarter, up from 10.8% in the first quarter of this year and 8.5% a year ago. The direct office vacancy rate rose to 10.4% in the quarter, compared to 9.6% in the first quarter this year and 7.5% one year ago.

On the investment side, Delta recorded office sales volume of $45.1 million in L.A. County in the second quarter, compared with $245 million the previous quarter and $3.7 billion for the year 2008. The average sale price fell to $171 per square foot in the second quarter, versus $220 per square foot in the first quarter of 2009 and $323 in all of 2008.

The bid-ask gap remains large in L.A. County as it is in every metropolitan area, and as that gap narrows later in 2009 or 2010, market velocity will pick up and pricing will beestablished, Delta says. But until then, its report forecasts, "Look for anemic transaction levels."