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LOS ANGELES-The diversity of Southern California’s economy could help its office market revive sooner than the office markets in some parts of the country, but recovery is still a long way off, and certain elements must fall into place before the office market enjoys any relief, according to a forecast. The new outlook from the USC Lusk Center Casden Forecast states that Southern California’s office markets “are likely to face significant challenges over the next two years” despite the prospects for an earlier recovery than some parts of the nation. Office market fundamentals throughout Southern California are expected to remain weak due to high unemployment, the Casden Forecast points out, citing vacancy rates that have risen in the last year to more than 15% in Los Angeles, 19% in Orange County and 22% in the Inland Empire. Asking rents have declined year-over-year in Los Angeles and Orange County by more than 10%, and increased by just under 2% in the Inland Empire, according to the forecast, which uses data supplied by Grubb & Ellis for its statistical comparisons.

In addition to the impact of layoffs in a number of industries, the forecast cites “bankruptcies and mergers of financial service firms” as one of the major contributing factors to the decline in office occupancy and asking rents. Orange County, in particular, has suffered from the collapse of the mortgage industry−including the subprime mortgage business−which occupied substantial blocks of space in the county before the collapse.

In the investment sales facet of the office market, “Tighter lending standards are keeping many potential buyers out of the market,” the Casden Forecast points out. However, as more and more distressed properties come onto the market, “an increase in sales activity is likely,” it states.

For the near future, Southern California’s office markets will continue to suffer from high rates of vacancy and declining rents, according to the forecast, which provides separate snapshots foreach of three submarkets within the region: Los Angeles County, Orange County and the Inland Empire (Riverside and San Bernardino counties).

In Los Angeles, vacancy rates that increased substantially over the last year may not level out until early 2011, and office rents will continue their downward trend, the forecast says. The county’s office market totals nearly 189 million square feet, according to Grubb & Ellis. The Casden report notes that, “In spite of the widespread economic troubles,construction activity has been relativelyhigh,” with nearly two million square feet ofspace that came onto the market in 2009 and 1.5 million more under construction. “Togetherwith the increase in sublease space, the newconstruction will no doubt put significantdownward pressure on rents,” the report states. Vacancy will likely increase and rents decline the most in areas populated by a high fraction of financial services tenants and in the submarkets withnew space under construction, such as West andNorth Los Angeles, according to the forecast.

In Orange County, the market “may be a leader in recovery” after being a leader in the office downturn, since vacancy rates that increased substantially over the last year are likely to peak sooner. The Casden forecast expects that vacancy to peak by early to mid-2010, but rents may decline 20% to 30% more as landlords reduce rates to attract and retain tenants. On the plus side, according to the forecast, only 80,000 square feet of new space is now under construction in the county and no new space was added to the market in 2009. Grubb & Ellis tracks more than 86 million square feet of office space in the county, but some others report the total at more than 100 million square feet.

In the Inland Empire, which is the smallest of the three submarkets at approximately 27 million square feet, “Vacancy rates have bounced around duringthe last four quarters,” the Casden Forecast points out. Overall, however, vacancy has increased and the amount of empty space is likely to continueto increase over the next two years−but at amore modest pace compared to Los Angeles, the forecast notes. After a short-lived bump in asking rentsin the first quarter of 2009, rents declinedagain and will likely continue to do so for thenear future. The forecast predicts that the rate of decline in rents is will be significantly lower in the Inland Empire than in Los Angeles or Orange County, a trend that it deems “somewhat surprising considering the large level of recent completions and properties under construction relative to totalmarket size.” One hope is that the office market willbenefit from “some positive spillovers from the more optimistic industrial property outlook for the region,” the forecast concludes.

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