Monday, January 25, 2010

Southern California Office Market on the Brink: Vacancies Edging Up, Rents Edging Down, Landlords on Edge; Recovery May Be Far in the Horizon

Don't look for over-crowding in the adjacent cubicle, according to a report by the Los Angeles Times.

The office fundamentals in SoCal region can be pegged somewhere between pathetic and downright awful:

Perhaps the best news coming out of the fourth quarter was that the ongoing rise in commercial vacancies slowed noticeably, and many expect the rental market to finally bottom out by the middle of this year. Unfortunately for landlords, though, it may take a long time for their buildings to fill up again. That means more bargains ahead for tenants.

Overall office vacancy in the fourth quarter in Los Angeles, Orange, San Bernardino and Riverside counties was 18.5%, a substantial jump from 14.4% a year earlier, according to commercial real estate brokerage Cushman & Wakefield.
What will be the panacea to the beleaguered office market? In three words: jobs, jobs and jobs. Although economists declare we are in a recovery, an increase in hiring -- and the willingness for firms to increase their space requirements -- may be a year or more away.

Furthermore, firms have down some internal "downsizing" in terms of space requirements for their employees. The report cites how law firms, a mainstay for the Los Angeles office market, are now alotting 500 sq ft per attorney vs. 700 sq ft during flusher times.

The office market is expected to stabilize in 2010 and may not recover in earnest for some time after that.

On a positive note, Downtown Los Angeles has proven to be a somewhat stable market, experiencing a 16.7% vacancy rate vs. about 14% a year earlier.

According to a panel of commercial real estate experts who convened on Friday, in spite of the area's woes, California may be down, but is not out. They cite the following reasons:
  • California is prone to booms and busts, but since 1994, the state has exceeded national norms in terms of income, employment and population growth
  • California, by virtue of its proximity, should benefit from the global recovery which is led by Asia
  • The predicted flood of distressed assets has yet to materialize
It may be hard to swallow, but pundits predict that office valuations may end up being 30 - 40% off market highs achieved just 2 - 3 years ago. But, as punishing as these numbers are, they are remarkably consistent with the declines in the stock market and other artifacts of the bubble era.