Although Southern California’s office market will continue to suffer next year, the industrial market is poised to emerge from the recession because strong growth in India and China is fueling demand for U.S. goods. That’s according to the 2010 Casden Industrial and Office Market Forecast by the University of Southern California Lusk Center for Real Estate.

"Heightened traffic at the ports of Los Angeles and Long Beach will create more jobs and an increased need for warehousing across Southern California. And the expected growth nationwide in green technology, education and healthcare should bode well for the recovery of LA's office markets in 2011," said Tracey Seslen Ph.D., co-author of the Casden Real Estate Economics Forecast.

Industrial vacancy rates in Orange County are projected to peak at 7.2% in mid to late 2010, up from the current rate of 6.5%. Part of the reason for that is the proximity of ports in Los Angeles and Long Beach. In addition, a strong manufacturing base and lack of new construction should help to keep vacancies low. However, rents are not projected to return to pre-recession levels until 2011 at the earliest, according to the report.

Meanwhile, Los Angeles County’s industrial market, the nation’s largest with more than 1 billion sq. ft. of space, has experienced softening demand but vacancy rates still remain tight at 3.3%. Despite the low vacancies, rents have not held up as well. Asking rents, which have fallen dramatically by 16% since the start of the recession, are expected to drop even further.

“We are nevertheless bullish on the medium- and long-term outlook for industrial space in Los Angeles,” according to the report. “While ports have seen a dramatic reduction in containers over the past two years, a striking change is in the balance between outgoing and incoming containers — outgoing containers with cargo have been ticking upward this quarter, while inbound containers continue to fall.”

The report also notes that if energy prices begin to rise again, that could also benefit Los Angeles industrial space, with the city’s proximity to ports becoming increasingly beneficial.

In stark contrast, the Inland Empire’s industrial market has seen vacancy rates climb to 12.8%, and rents fall sharply to $0.32 at the end of the third quarter, down from $0.41 in the fourth quarter of 2008.  

“As a whole, we expect the market to begin to recover in 2010, but that does not imply that all submarkets will recover,” according to the report. “Specifically, we expect Chino and Temecula to behave much like Los Angeles and Orange Counties, but other parts of the region will wait a long time before experiencing a recovery.”