According to newly revised economic projections, the fabric that weaves together the local economy may place Los Angeles in a position to ride out a recession better than other major metropolitan areas around the country.
The breadth, depth and diversity of the Los Angeles business community have produced a steady, slow-growing economy. Certain pockets within the county, with localized business clusters, have experienced spikes and dips. But the county as a whole remains relatively insulated from these localized surges. Although economic contraction is forecast in the near term, resumption in growth is anticipated for the second quarter of 2002. Due to the constrictions on supply in the Los Angeles basin, once the demand side of the economy picks up, overall growth is expected to revive. The same case can be made for the industrial real estate market in Los Angeles.
So far, the downturn in the economy has had a modulating effect on the local industrial real estate market. Transaction activity, average asking lease rates, and vacancy rates have remained comparatively unchanged. For each of the past three quarters, total sale and lease activity throughout Los Angeles County remained between 8.4 million square feet and 8.5 million square feet. Average asking lease rates held steady at 51 cents per square foot throughout 2001. That rate is only a penny down from the high-water mark of 52 cents set the last half of 2000.
Vacancy rates have only drifted up eight-tenths of a percentage point since the end of 2000, and remained well below 4%. Although construction activity ebbed in the second quarter, construction starts surged during the third quarter to the highest level in more than a year, most likely the by-product of the long gestation period for land deals that were fueled by low vacancy rates, the scarcity of quality product, and pre-Sept. 11 optimism.
Mirroring the broader business community, Los Angeles County’s office market succumbed to the economic slowdown and changed very little over the course of the third quarter. The downshift in activity was most evident in the suburban markets. Downtown Los Angeles and the San Gabriel Valley shone brightly as the beacons of activity amid the indecision experienced in the other areas of the county.
The postponement of business decisions observed during the second quarter continued into the third quarter and was exacerbated by the Sept. 11 attacks. The widespread indecision produced a lackluster third-quarter performance overall.
The silver lining may be that most of the market indicators remained virtually unchanged rather than eroding further; thus giving rise to the prospect that the bottom of the market may have been reached The average countywide vacancy rate for direct space floated up less than a tenth of a percentage point to 11.5%. The vacancy rate for sublet space remained unchanged at 3.2%.
The average asking lease rate for class A and B space in the county held constant at $2.13 per square foot, the same rate as in the second quarter. Net absorption hovered just below zero at negative 182,000 square feet, whereas last quarter net absorption was barely in the black at 294,000 square feet. As a point of comparison, quarterly net absorption during 2000 ranged from a low of 1.2 million square feet to a high of more than 2 million square feet. Clearly, leasing activity in 2001 has been reduced.
Analysis provided by CB Richard Ellis’ Global Research and Consulting.
