LOS ANGELES—The Los Angeles office market is one of the most resilient in the country, according to new research from CBRE, which shows that the L.A. office market is better prepared than other major US metros to survive a deep recession. CBRE measured office markets in major US cities, and found that L.A.'s restrained new office development and diverse employment base will lead to less disruption in the event of a major economic turn, while markets like Boston, New York and Washington, DC will be the most affected during a recession, and San Francisco could expect rental rates to decrease by 3.4%. Los Angeles, by comparison, would likely see no change in rental rates and a modest 123 basis point increase in vacancy rates. To find out why Los Angeles' office market is so well prepared for economic turbulence, and how this compares to the previous cycle, we sat down with Petra Durnin, head of research and analysis at CBRE Southern California, for an exclusive interview.
GlobeSt.com: Why is Los Angeles better equipped to survive a major recession than other markets?
Petra Durnin: Less cyclical sectors, such as education & healthcare and leisure & hospitality, currently represent a much larger share of Los Angeles' total employment than manufacturing, finance, and construction, which are much more cyclical. The stability of the less cyclical sectors means fewer jobs shed during a recession, which means less vacancy disruption and less price depreciation. Even in a deep-recession scenario, Los Angeles' vacancy would likely increase only 123 basis points, whereas other more susceptible markets could rise four times that.
GlobeSt.com: How is this different from the last cycle?
Durnin: In the few years before the last recession, there was explosive job growth in finance and construction. When those jobs were lost in the recession, it caused a big shockwave through the submarkets with rising vacancies, occupancy losses, and value depreciation. Los Angeles today is also well-positioned to withstand the factors that contribute to a deep recession including rent and vacancy sensitivity linked to changes in employment growth, current level of rents and vacancies, and future employment growth.
GlobeSt.com: Does this also mean that L.A. will recover more quickly after a recession? In the Great Recession, Los Angeles was one of the cities to experience a slow recovery.
Durnin: Los Angeles took longer to recover in the last recession in part because of the significant jobs lost in the legal and financial sectors, two of the largest industries in Los Angeles, that never came back and it took a while for the other sectors to strengthen to offset those losses. The next downturn is likely to be less dramatic, which will mean minor effects on vacancy.
GlobeSt.com: How likely are we to encounter another deep recession?
Durnin: Recessions are inevitable, but since the tenant base has diversified so much in Los Angeles, it is better positioned for a downturn and now is the time to start planning and preparing for that inevitable slow-down. Los Angeles will reach full employment in early 2017, so there will be less job growth in 2018 and 2019, at which point we will be close to the end of this cycle.
LOS ANGELES—The Los Angeles office market is one of the most resilient in the country, according to new research from CBRE, which shows that the L.A. office market is better prepared than other major US metros to survive a deep recession. CBRE measured office markets in major US cities, and found that L.A.'s restrained new office development and diverse employment base will lead to less disruption in the event of a major economic turn, while markets like Boston,
GlobeSt.com: Why is Los Angeles better equipped to survive a major recession than other markets?
Petra Durnin: Less cyclical sectors, such as education & healthcare and leisure & hospitality, currently represent a much larger share of Los Angeles' total employment than manufacturing, finance, and construction, which are much more cyclical. The stability of the less cyclical sectors means fewer jobs shed during a recession, which means less vacancy disruption and less price depreciation. Even in a deep-recession scenario, Los Angeles' vacancy would likely increase only 123 basis points, whereas other more susceptible markets could rise four times that.
GlobeSt.com: How is this different from the last cycle?
Durnin: In the few years before the last recession, there was explosive job growth in finance and construction. When those jobs were lost in the recession, it caused a big shockwave through the submarkets with rising vacancies, occupancy losses, and value depreciation. Los Angeles today is also well-positioned to withstand the factors that contribute to a deep recession including rent and vacancy sensitivity linked to changes in employment growth, current level of rents and vacancies, and future employment growth.
GlobeSt.com: Does this also mean that L.A. will recover more quickly after a recession? In the Great Recession, Los Angeles was one of the cities to experience a slow recovery.
Durnin: Los Angeles took longer to recover in the last recession in part because of the significant jobs lost in the legal and financial sectors, two of the largest industries in Los Angeles, that never came back and it took a while for the other sectors to strengthen to offset those losses. The next downturn is likely to be less dramatic, which will mean minor effects on vacancy.
GlobeSt.com: How likely are we to encounter another deep recession?
Durnin: Recessions are inevitable, but since the tenant base has diversified so much in Los Angeles, it is better positioned for a downturn and now is the time to start planning and preparing for that inevitable slow-down. Los Angeles will reach full employment in early 2017, so there will be less job growth in 2018 and 2019, at which point we will be close to the end of this cycle.
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