Living La Vida Local
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the sixth straight quarter of national growth in the commercial property sector. David Lereah, the National Association of Realtor’s chief economist, notes that the improvement is long-term, "Our commercial leading indicator has risen in 11 out of the last 12 quarters, meaning the recovery in commercial real estate will be sustained well into 2007."

Here’s how the various commercial property sectors are faring:

OFFICE:

Increased construction costs have caused a slowdown in the development of speculative office real estate. (Speculative development means you build an office building or complex before a lead tenant has been found.) This translates to fewer options for tenants (try finding decent office space in L.A. County, it’s has hard as trying to buy a house was three years ago).

Tenants are renewing their current leases or committing into longer-term leases with build-to-suit options. By the end of 2006, the national office vacancy rate will be holding steady at 13% - the lowest rate since 2001. Ventura County is forecast to have the lowest vacancy rate at just below 6.0%. Orange County should be at 7.6%.
Basic economics continue to indicate that limited supply and increasing demand are causing vacancy rates to fall and rents to grow. Overall rent growth in 2006 will be 5.5%, up from 5.2% last year. Gross office rents are highest in New York City ($47.00 per square foot) followed by Washington, DC at $31.00/psf. The national average is $19.00/psf.

The total dollar value of commercial office buildings trading hands so far in 2006 is $55.7 billion, 12% higher than the same period last year. The average office cap rate on closed transactions is 7.0%, down from 8.5% in August 2004. The cap is closer to 6.5% in L.A. and other major markets.

Markets with the highest office sales prices are Manhattan ($574/psf), Washington, DC ($457/psf), and Stamford, Conn. ($427/psf). Los Angeles is in the range of $400/pfs.

If supply is held in check next year and demand continues to be strong, rent growth in 2007 is expected to be close to 8.3%.

INDUSTRIAL:

The demand for Industrial warehouse and distribution space has brought the industrial vacancy rate down to a 5-year low – 9.7%. In 2006, a record 204 million square feet of space will be added to the nation’s industrial real estate market. Much of this new space is designed to meet the needs of specialized warehousing and distribution industries.

RETAIL:

Retail is the sector of the commercial marketplace that is expected to suffer the most during the real estate downturn. Rising interest rates and fluctuating oil prices are impacting consumer confidence. These and issues like the ease of online shopping have softened demand for retail space. While the current vacancy rate of 8.1% is below the double-digit rates seen in 2002, it is still a cause for concern. Speculators are forecasting trouble in the “big box” single tenant marketplace; Businesses such as furniture stores are already taking a hit.

On the mall scene, the fallout from the merger of Federated Department Stores with May Department Stores will continue to impact regional malls and main streets in many markets.

MULTIFAMILY:

Multifamily is another strong investment area. The slowdown in the housing market has positively impacted the multifamily market across the nation.

Potential first-time homebuyers elect to stay renters. The California Association of Realtors notes that about 23 percent of first-time homebuyers in California were able to afford a median-priced home at the end of the 3rd quarter of 2006 compared with 30 percent in 2005. As you know, in Los Angeles, housing affordability remains a problem. Our multi-family vacancy rate is just 2.0%, compared with the national vacancy rate of 4.6%.

Locally, the decline in "condo conversion" activity is having two impacts. First, there has been a flipping of some multi-family apartment complexes originally bought for conversion purposes back to multifamily investors. Second, the return of properties destined for conversion will increase vacancy rates as these multifamily complexes are returned to the active rental inventory. By the end of 2006, the multi-family vacancy rate will be up slightly to 5.2%.

HOTELS AND HOSPITALITY:

Both revenue per available room (known as RevPAR) and occupancy rates for the hospitality sector are increasing. RevPAR for the third quarter of 2006 was $80.96, which when seasonally adjusted for the end of the year will make for an annual average of $78.25, up from the $71.46 recorded last year. A record number of new rooms are being built in 2006 and 2007, which will keep occupancy rates and RevPAR at or just slightly above current levels.

NAR Economist Lereah concludes. "We are seeing a deceleration in the rate of growth – apparently in response to higher oil prices and interest rates – so the expansion in net absorption and commercial construction should continue, but at a slower pace."

For information on Southern California investment properties there is a great website at www.SoCalInvestmentRealEstate.com.