The southern portion of the Golden State is golden once more. Thanks to a variety of factors, Southern California is again thriving. Some in the real estate industry say it's the best times they've seen in years, with growing economic demand translating into lower vacancies, rising lease rates and additional development opportunities.
Southern California real estate markets -- Los Angeles, Orange and San Diego counties -- picked up momentum and started to boom in 1998, says Robert Osbrink, senior vice president and regional manager/Los Angeles Metro for Grubb & Ellis. "Rental rates were up, sometimes sharply for all product types and in all areas," he continues. "Vacancy rates came down. Office and industrial markets experienced high activity and increased demand. Investors searched the market for acquisitions, boosting investment sales to record levels in both volume and price."
Victor Coleman, president of Arden Realty, a Los Angeles-based real estate investment trust, adds that Southern California fundamentals are the best he's ever seen. "We have superb job growth. We have more leasing [now] in our portfolio in Southland than in the past four years," Coleman says. "Southern California is the kingpin for entrepreneurial tenants; our average tenant starts at 3,000 or 5,000 sq. ft. and then moves up to 10,000 sq. ft. as they grow. Rental rate movement is going on average 10% a year; next year we're projecting an 8% increase. The market is high on real estate on operating level."
Mark E. Van Ness, CEO at Sperry Van Ness based in Irvine, goes one step farther. He says the Southern California real estate market remains hot, even taking into account a recent market correction in less than a month. In Orange County, for instance, increasing demand, strong job growth and continued population growth is benefiting the real estate market. "There is pent-up demand because we didn't have development in the last seven years," he explains. "That means increasing values, increasing rents, and decreasing vacancies - all the things owners like to see."
Southern California real estate seems to be holding its own, with few overbuilt situations and now a slowing of speculative development, agrees Edward R. "Ned" DeLorme, partner at Bridge Capital Ltd., an opportunistic investor and lender to real estate markets based in Newport Beach, Calif.
"Orange County is doing extremely well now with its high tech, media, finance, insurance, real estate," DeLorme says. "Vacancy rates have gone down dramatically, but as larger companies start to cut back, which may happen as a result of global woes, we may see upward pressure on rental rates. San Diego continues to perform fairly well with high tech, biotech, and the Maquiladora plants. In L.A. County, Long Beach tends to benefit if the dollar goes up with imports or if it goes down, with exports, so my sense is the ports are going to stay busy and the South Bay area will benefit."
Bob Ruth, managing director of the Trammell Crow Co. in Los Angeles concurs. "We don't have large vacancies, and with the area's difficult entitlement process we don't have overbuilding," he explains. "But the badnow is that everything outside of the real estate business affects us. Real estate fundamentals are very solid, but we are being told we can't do business the way we did yesterday. Look at what is happening right now; it is very difficult to make very long term decisions when people are predicting recession in first quarter of 1999."
Many in the industry say that, this time, many of the forces affecting the real estate world are unrelated to the industry but are outside forces such as the Asian flu, the financial crisis in Russia and investor uncertainty on Wall Street. Real estate in Southern California remain solid, they add, with strong occupancy and per sq. ft. numbers, but other factors are clouding the situation.
"The situation on Wall Street, the Nikkei and other financial markets around the world has created a severe imbalance between the dollar and foreign currencies, forced pension funds and insurance companies to seek safer and less volatile investments and [has] made it more difficult for real estate investment trusts to raise capital," says Lawrence Bond, principal of The Summit Fund, a real estate investment and development firm in Century City, Calif. "These and other factors point to a shorter upswing in the real estate cycle than most experts have predicted."
Los Angeles Nonetheless, a look at real estate in Southern California today shows overwhelmingly positive signs of a resurgence in growth. Jeffrey Munger, an analyst with AMRESCO Research in Dallas, notes that the L.A. economy has developed momentum and regained its luster, pointing out that the unemployment rate in July was 6.1%, down from 6.7% a year earlier. "All major industrial sectors reported positive job growth over the past year, with the transportation/utilities, manufacturing and government sectors leading the way," he says. "More jobs have been created in L.A. over the past year than any other U. S. metropolitan area."
That's one of the reasons R. Todd Doney, senior vice president at Cushman Realty Corp., is bullish on downtown L.A., which currently has a vacancy rate of about 22%, down from 29% in 1993. "As our other suburban markets continue to tighten, downtown is going to get more activity."
Absorption is occurring. Ernst & Young leased 135,999 sq. ft. at 725 S. Flower whilesay Deloitte & Touche is slated to occupy 340,000 sq. ft. at Two Cal Plaza - space to be vacated by the Metropolitan Water District (MWD). The MWD is expected to relocate to its new headquarters, now under construction at Union Station, early in 1999.
Downtown towers also are selling. In the second quarter of this year, the 436,000 sq. ft. 801 Tower at 801 S. Figueroa St. was sold for an estimated $175 per sq. ft. The new owner, Pacific Realty Trust, reportedly has placed the Class-A office building under contract for $200 per sq. ft.
Other areas of the city also are experiencing positive trends. According to Cushman Realty, the total vacancy for the Westside Los Angeles market fell slightly to 10.9% from 10.7% during the third quarter of 1998. Recent lease transactions include SCPIE Holdings Inc. signing the largest Westside L.A. office leas in 1998, a 95,000 sq. ft.in the 1888 Century Park East building in Century City. Edutrek International Inc. signed a least for 88,200 sq. ft. at 12655 Jefferson Blvd. in the lower Eastside.
Arden's Coleman says his company is undertaking a major rehab of a landmark building, on Glendale off Wilshire in Westwood, a 313,000 sq. ft. structure. "We're redoing a building from the early 1960s vintage to a modern day facility," he adds. "There has been no new construction in Westwood since 1987."
At the same time, DreamWorks SKG and Playa Capital Co. LLC have agreed to basic terms that would finally bring DreamWorks' headquarters and studio to Playa Vista. Among the new construction, JMB Realty is continuing in the planning of Constellation Place, a 38-story office tower with 700,000 sq. ft. in Century Plaza.
Real estate activity in the Tri-Cities area - Burbank, Pasadena and Glendale - continues to be strong, according to Cushman's Doney, although a slowdown is anticipated because of the current global financial situation. "Over the last few quarters, absorption has been relatively slow, with the entertainment industry's need for space tapering off dramatically," Doney adds. "Overall, the Tri-Cities is still a good market. We don't have a situation that other markets in the country have, with a tremendous amount of spec buildings. When entertainment companies stop (leasing space), others start taking their place, such as insurance and telecommunications. Vacancy is probably 10% to 12%, and investment activity remains active but is no where close to what it was six to nine months ago."
Real estate sources say PacTen Partners, a Los Angeles-based developer, is expected to announce leases totaling 150,000 sq. ft. at Glendale Plaza. The 24-story, 520,000 sq. ft. high rise, is the first speculative high-rise office building built in Southern California in nearly a decade. As a spec office building in what is a non-pre-leasing market, Glendale Plaza is considered by many to be a bellwether for commercial office leasing activity in Southern California, particularly the Tri-Cities area.
Also in the area, Foundation Health Systems Inc. in Woodlands Hills leased 101,000 sq. ft. at Warner Center Plaza III, pushing the occupancy in the 585,000 sq. ft. building past 90%. Media Studio North, a 215,000 sq. ft. office project, opened with Microcadam and Equilon Enterprises pre-leasing 90,000 sq. ft.
On the industrial side, brokers, analysts and owners see a strong real estate market for the next nine to 12 months. "We have not seen any slackening of demand from our tenants in that market, primarily in the L.A. Basin and San Diego," says Martin J. Coyne, regional manager and vice president for AMB Property Corp. Based in San Francisco, AMB owns 6.6 million sq. ft. of industrial space throughout Southern California. "The South Bay market around L.A. and Long Beach is the strongest submarket in L.A., and we're still seeing rental growth with very little vacancy in that market place. The unknown is this trade imbalance. We're seeing plenty of full containers coming into L.A. with lots of goods. That's good for the industrial base, which is warehouse, but the scarcity of full containers going back with manufactured goods is a concern."
Although L.A. County is not soley dependent on only manufacturing goods, it might have a ripple effect, Coyne continues, "and as a result of that, we have adjusted out forecasts over the next few years. Originally we thought we'd see another two years of expansion, but scaled it back to only 1999."
He adds that rental rates in the area are roughly in the high 30 cents to 40 cents per sq. ft. per month range for Class-A space while Class-B space is in the mid 30 cents and climbing. In San Diego, Class-A industrial space in the choice locations, is in the 50 cents a foot range, "although it's a much smaller market, with fewer choices available, the rental rates have been historically higher."
Coyne says that in Orange County, Class-A space in the low to mid 40 cents [per month range]. "O.C. has tremendous occupancy rates, probably the strongest segment of the market throughout Southern California," he continues. "There is high demand there, and it's difficult to acquire new space."
Coyne adds that over the past two to three years, there has been a phenomenal appetite in the investment community for industrial product. "We feel that is changing, that there will not be the same level of acquisition activity as far as all the potential buyers are concerned," he adds. "The level of hunger is going to slow down the private money in the market place, and the pension money may step in."
Other brokers agree that L.A. County has seen a rapid decline in the availability of industrial space. In Central L.A., for example, new construction added 1 millionsq. ft. to the inventory, with another 700,000 sq. ft. planned for this year. Big box distribution facilities are planned or under construction in Santa Fe Springs, Buena Park, La Mirada, Norwalk and Downey.
Regent Properties recently announced that the Boeing Co. has signed a 10-year lease worth $35 million for 170,000 sq. ft. at West Hills Corporate Village in the San Fernando Valley. Boeing will relocate 275 employees to the former Hughes missile plant. West Hills Corporate Village is a joint partnership of Beverly Hills-based Regent Properties and Shamrock Holdings of California.
On the retail side, Munger of AMRESCO notes that innovation in retailer format, tenant mix and shopping center design andwill continue to blossom in the area. "After years of slow growth, the L.A. County retail market should continue to experience healthy expansion through the end of the decade," he says. "Retailers will continue to enter into areas that were once shunned and increasing land costs will force many to try innovative layouts."
Renewed economic expansion and sustained growth in employment, population and retail sales have fueled this sector. One of the big projects is TrizecHahn's Hollywood and Highland project, a $385 million, 640,000 sq. ft. development that is slated to include television broadcast facilities as well as retailers and restaurants. Theater chains have been expanding, with owners recognizing an opportunity in under-served markets. A 150,000 sq. ft. entertainment/retail center with 10 to 12 screens is planned in Huntington Park, for instance. La Curacao, a department store catering to the Hispanic market tripled its central L.A. store, to 90,000 sq. ft., and is looking to expand further.
However, consolidation in the grocery industry is a concern, with Albertsons purchasing Lucky and Kroger - which owns Ralphs, Hughes and Food 4 Less - buying Fred Meyer Inc. Safeway owns Vons.
Orange County and San Diego Neighboring Orange County continues to enjoy a surge in real estate activity. O.C. boasts low inflation, unemployment in the 3% range. Some 47,000 new jobs were created last year, further fueling activity, say brokers.
"The area has great fundamentals, with [low] vacancy rates and [high] net absorption," says Jeffrey J. Bitetti, director of marketing for Nexus Development Corp. of Newport Beach. "Rental rates are showing all positive signs, and there hasn't been any new building in the last 10 years in this market place."
Nexus is expected to begin construction of Twin Towers at MacArthur Place, two nine-story office towers, totaling 410,000 sq. ft. in the MacArthur Place development, a project off the 55 at MacArthur, minutes from John Wayne Airport.
"We feel very strongly about the marketplace," Bitetti adds. "We are confident that we'll be successful in spite of what's happening with REITs because we're going to be where the rubber meets the road. It's a great location. First American Title has relocated to this location, and we're thrilled about that. What you have is the only master- planned project in O.C. under construction."
The Orange County office market continues to show strength. Last year, some 1.5 million sq. ft. was absorbed. The John Wayne Airport area accounted for the largest share of absorption during the third quarter, according to Cushman. In the third quarter, Broadcom Corp. leased 162,000 sq. ft. in the Irvine Spectrum. Rental rates, according to Cushman, have increased 10% to 20%, depending on the submarket.
In San Diego, the real estate market also has brightened considerably, brokers say. "The robust office markets - UTD, Del Mar Heights, Rancho Bernardo, Carlsbad, Sorrento Mesa and Scripps - remain strong," says Dorcey Abshier, a managing director at Trammell Crow who oversees its San Diego operations.
So - for the moment at least - all remains golden in the Southern California real estate market.