Panels of real estate professionals surveyed in California’s major office and investment markets believe the credit crunch in Los Angeles and San Diego is starting to ease while conditions in Orange County and San Francisco aren’t quite as optimistic.
According to the latest Allen Matkins/UCLA Anderson Forecast Commercial Real Estate Survey, there was a sense that credit conditions would likely remain tight for the near term in Los Angeles and San Diego while higher financing and land costs would keep rental rates lower in Orange County and San Francisco, respectively.
"The Allen Matkins/UCLA Forecast Survey looks forward to market conditions in 2011 and asks the regional panels for their views of changes in supply and market conditions," said Jerry Nickelsburg, economist, UCLA Anderson Forecast and author of the survey results summary, in a statement. "What is interesting about this survey is that by looking beyond the near term it picks up the impact of today’s economic conditions on longer-run market conditions. In the case of San Francisco there appears to be a difference of opinion between the panel’s view and the economic fundamentals from our forecasting models. As this unfolds, some interesting investment opportunities could develop."
The panel does not believe the Los Angeles market will tighten between today and 2011. The survey results imply an average vacancy rate in Los Angeles at levels lower than experienced in the last 20 years, and rental rates consistent with a stable future evolution of market fundamentals. Today’s market represents a healthy office space market and with new supply expected to come on the market over the next three years at a rate just about equal to the expected increase in demand — the market will remain healthy.
The panel was pessimistic last December about San Diego’s office market. In the latest survey, composite index, rental rate index, and vacancy rate index are higher. The panel sees the market tightening out to 2011 with both occupancy rates and rental rates higher.
"We see the turnaround as a result of the growth in office using employment," said Nickelsburg. "Although San Diego did not make much progress in the first quarter of 2008 in terms of overall job growth, outside of finance, office space using employment grew in the first quarter 2008 from the first quarter 2007 by 1.5 percent."
The survey finds that developers are pessimistic about this market and shows downward pressure on the price of land for office space development signifying a weak market. With higher financing costs and slack demand this is a market where investors will have to choose their projects carefully.
For the first time, the San Francisco office market has been added to the survey. The panel’s analysis of the current San Francisco market is similar to the Orange County market except that land costs are seen to be a more significant factor in the supply equation. The panel forecast that occupancy rates would go up at the same time as real rental rates are going down. This is characteristic of a weak market. But office-using employment has been increasing in recent years and real rental rates and occupancy rates are finally going up again. "What is interesting here is that the recovery from 2001 downturn, if it continues apace, could result in a shortage of office space by 2011 — the opposite result of the panel’s assessment — as a consequence of the pessimism of investors and financiers," said Nickelsburg.
Allen Matkins Leck Gamble Mallory & Natsis LLP, founded in 1977, is a California law firm involved with real estate and construction, and the UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation.
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