L.A. Market Rocks: All Categories of Commercial Real Estate in the Los Angeles Market Are Thriving. Industrial Properties Lead the Way with a 2.9 Percent Vacancy Rate as of First-Quarter 2005

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THE LOS ANGELES ECONOMY IS ONE OF STRONGEST IN THE COUNTRY TODAY. After losing roughly half a million jobs in the early 1990s--nearly 40 percent due to defense cutbacks--and suffering a devastating race riot and earthquake, the area made a strong comeback beginning in the late 1990s and then later in the post-9/11 period. [??] In spite of the recovery, however, Los Angeles has lost a lot of Fortune 500 firms in the last decade, says Jack Kyser, chief economist with the Los Angeles Economic Development Corporation. He includes among the casualties local banks such as First Interstate Bancorp, which was acquired by Wells Fargo Bank, and The Times Mirror Co., Los Angeles, which was purchased by the Tribune Co., Chicago. [??] Today the Los Angeles County economy is dominated by global trade, tourism and, perhaps even more than in years past, the entertainment industry. But there have been many other changes to this economy in recent years. Although there has been an economic recovery, many employers are small businesses facing increasingly strong domestic and global competition, especially from China, says Kyser. [??] Industries like apparel, plastics and metal fabrication are especially vulnerable, although a lot of industrial employment does not involve manufacturing, notes Kyser. Warehousing, distribution, logistics and pre- and post-production work for the motion picture industry are just some of the activities carried out by industrial tenants in Los Angeles, he says. [??] Some local employers have managed to expand their plants and equipment without bringing in new workers. They avoid taking on new employees because of the high cost of not just health insurance, but also workmen's compensation insurance, electricity and paid family leave, according to Kyser. Plus, many of the jobs created in recent years have lower wages and fewer benefits than pre-recession employment.

While the blue-collar job market has suffered, even during the recovery from recession, commercial real estate is healthy. According to Shelley Magoffin, president of Q10/Dwyer-Curlett & Co., Los Angeles, "Every [commercial real estate] product type today is doing wonderfully."

Although that may be a slight exaggeration, there is no question that one area of the county that is experiencing explosive development is downtown Los Angeles. This is where a massive number of residential condominiums and apartments, and massive amounts of retail space and even some office space combined with recreational venues are being developed.

The development of mixed-use projects throughout the county is the result of high land costs, says Magoffin. But building up does not mean that public spaces are being sacrificed. One of the biggest and most ambitious developments being planned for downtown is the $1.8 billion Grand Avenue project, a 3.5-million-square-foot mixed-use project on nine acres. The project will include every possible kind of development, with the exception of single-family homes and industrial buildings. In addition, Grand Avenue will have a 16-acre public park and a new streetscape.

Industrial is king

"Most of the demand for industrial space in the U.S. has occurred in just one market--Southern California," says Jim Costello, senior economist at Torto Wheaton Research, Boston. "This is a function of all the imports from China," he says. So it is no wonder that the industrial market is the strongest commercial real estate sector in Los Angeles County.

As of first-quarter 2005, the vacancy rate in the Los Angeles industrial market was 2.9 percent--the strongest industrial market in the country, according to New York-based Cushman & Wakefield. That is substantially lower than the markets with the next lowest vacancy rates in the United States. The markets carrying that distinction are Seattle and Tampa, both of which had vacancy rates of 6.3 percent as of first quarter 2005, according to Cushman & Wakefield research. …