The credit crisis as a result of the subprime fallout was the most significant event of the past quarter.
For all intents and purposes, the quarter began on Aug. 17, when the Federal Reserve cut the discount rate to address that “financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward.”
This was followed in mid-September by a cut to the federal funds rate, a secondary attempt, to address these market conditions.
As a result of these changing market fundamentals, many sellers have taken their properties off the market and are waiting to see what develops. This has drastically reduced the investment activity throughout the region. Despite this, deals are still getting done, such as 1 Baxter Way in Thousand Oaks and One Wilshire in Downtown Los Angeles, as institutional and lesser leveraged entity investment remains strong.
The market fundamentals of greater Los Angeles remain relatively strong. Vacancy rates are stable at 8.9% and average asking lease rates have increased to $2.76 per square foot.
It appears that, as of now, the commercial real estate market in greater Los Angeles has been shielded from the subprime fallout as the challenges brought by the drastic reduction in investment activity has been met by continuing demand and limited supply of commercial space. And the unemployment rate in Los Angeles County still remains significantly below a level that draws recessionary concerns.
Industrial Market
The recent upsets in the capital markets still appear to have had minimal impact on the Los Angeles industrial market. Although activity may be modified by a “wait and see” approach, any economic drag on the industrial sector is predicted to be offset by expanding economies abroad, which provide a significant percentage of income to many companies and growth opportunities locally.
JM Eagle is the most recent example of the strength of offshore interests dictating site location. The large pipe manufacturer will move its headquarters to Los Angeles in order to be closer to its Asian suppliers and its plants in the Western region of the U.S.
Although Los Angeles County experienced two consecutive quarters of negative absorption this year, the third quarter proves substantial, posting 514,159 square feet of absorption, up from last quarter’s negative number of nearly 1.4 million square feet. If the current increase is any indication, past negative growth speaks more to the market’s continued lack of available quality space rather than a measurable slowdown of demand.
Limited activity is expected for the remainder of 2007 through early 2008, as a result of delayed decision-making in reaction to economic uncertainty. But distribution space in Los Angeles will continue to be a necessary commodity due in large part to our area’s growing role in global trade. Protecting that industrial space will be Los Angeles’ greatest challenge as a trend for converting older manufacturing space into high-tech facilities continues.
Data and Analysis provided by CB Richard Ellis Research.
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