Sunny Days in Southern California
Despite tremors in the entertainment industry earlier this summer, energy shortages, and the demise of the dot-coms, the Southern California economy for the most part remains vibrant. “While some tech and Internet-based companies are laying people off, other firms are picking up the slack and hiring as usual,” says Allan Arendsee, CCIM, of A.W. Arendsee Real Estate in San Diego.
Thanks to a beautiful climate, the region continually attracts growing numbers to its workforce while also maintaining its native population. “Southern California is everything and more than people say,” says Jodi Meade, CCIM, of CB Richard Ellis in Los Angeles.
An oversupply of new construction in Los Angeles temporarily may push vacancy rates up from their current level of 9.4 percent for neighborhood centers and 7.1 percent for regional shopping centers, says Joseph Gabbaian, CCIM, of Grubb & Ellis. Large speculative projects include the Grove at Farmers Market and the Promenade at Howard Hughes Center, he reports.
The properties in Los Angeles in most demand are “institutional quality grocery/drug-anchored shopping centers in strong markets,” according to Meade. Out of favor are power centers, factory outlets, and entertainment centers. Lease rates for class A and B space range from $1.75 per square foot to $5 psf triple net per month, and lease rates are expected to remain stable for the next year, Meade says.
San Diego's retail market has seen the “volume and quality of leasing transactions decrease by 25 percent to 30 percent” from previous years, reports Rick Puttkammer, CCIM, of Burnham Retail Group. At year-end 2000, the retail market experienced its highest occupancy rate in recent past — 96 percent. By the end of this year, 700,000 new square feet should be constructed, down from 1.8 million sf delivered in 2000, he says.
Despite strong economic fundamentals in Southern California, “user activity in the industrial market in greater Los Angeles is slowing down and vacancy is starting to tick up,” says Sam Foster, CCIM, of Jones Lang LaSalle. Vacancy rates hover between 5 percent and 6 percent, up from less than 5 percent in fourth-quarter 2000. Lease rates for distribution space average $6 psf triple net per month, and sales “activity for both first- and second-generation industrial product is brisk, with multiple offers,” Foster reports.
Just west of Los Angeles, Ontario “is one of the five areas in the United States that have developed as regional distribution hubs,” Foster continues. High vacancies due to a surplus of available space have driven prices down in Ontario, and “activity will slow and spec development will slow or stop, but vacancy will not rise above 8 percent,” he predicts.
Downtown San Diego mainly attracts local law firms and government-related tenants, and “while strong efforts are being made to lure tech tenants, they are not as yet established downtown,” Arendsee says. Despite this, the occupancy rate remains stable at 95 percent. Approximately 1.5 million sf of office space is in the planning stage; however, nothing will be delivered until at least first-quarter 2004. Lease rates have increased from 2000, and now typical rates for class A space in San Diego range from $2.30 psf to $2.60 psf per month, he says.
The occupancy rate in the Los Angeles office market stands at a healthy 90 percent, reports Randal Lee, CCIM, of Lilly Enterprises. The Mid-Wilshire and surrounding areas are active, as lease rates have remained at reasonable levels in most buildings. Lee expects that demand for office space in Los Angeles will slow in the near future and that new forms of office space, such as live/work developments, will become the next hot product.
In Los Angeles, “The pace of the [multifamily] market is strong,” reports Barry Baker, CCIM, of Grubb & Ellis. Due to a shortage of multifamily properties for sale, the occupancy rate hovers around 95 percent. The city has seen dramatic price increases since 1996, but prices seem to be stabilizing now. Construction is occurring to make up for the lack of product, mostly involving “luxury buildings in top locations that command top rents,” as well as condominiums and subsidized apartments, Baker says.
Although the growth rate in San Diego is slower than previous years and despite the construction of 5,000 new units annually, the city still does not have enough supply to satisfy apartment demand, resulting in a 98 percent occupancy rate, according to Terry Moore, CCIM, of ACI Commercial. Lease rates and sales prices have risen 30 percent in the last three years, with class A rates averaging $1.50 psf per month and prices averaging more than $125 psf, Moore says.
A lack of inventory also plagues Anaheim, where the occupancy rate exceeds 97 percent, says Gary Hunter, CCIM, of Re/Max Metro-Anaheim. Lease rates vary greatly among submarkets, ranging from 80 cents psf to as high as $2 psf, and rates are rising across the board, Hunter reports. Due to the diminished supply, sales prices have increased and will continue to rise, he says.
Compared with a year ago, activity in the Southern California hospitality market has slowed, mainly due to difficulties in obtaining financing, according to Eddy Chao, CCIM, of Asia Pacific Capital Co. in Los Angeles. Financing woes also are contributing to a decrease in large sales and in spec development. The occupancy rate has decreased slightly from last year, yet the region's revenue per available room has increased over the same time. “The hot markets [will] be Orange County and San Diego County,” Chao foresees.
Commercial real estate professionals living in Milwaukee and Madison, Wis., cite strong quality of life benefits and business support, along with top-rated universities, as the main reasons Wisconsin has weathered the recent economic storm with ease. “Wisconsin has always been steady as the world turns around it,” says Peter Ogden, CCIM, of Ogden & Co. in Milwaukee.
Due to the addition of several new speculative developments, the occupancy rate in Milwaukee has fallen to 93 percent, says Kenneth R. Braden, CCIM, of James T. Barry Co./Colliers International. Lease rates range from $3 per square foot to $4.50 psf annually for warehouses and have risen slightly in the past year, Braden reports.
Annette Gelbach, CCIM, of Gelbach LLC in Madison reports that “typical office rates range from $15 psf to $30 psf, depending on building class, location in [Madison], and amenities of the building.” About 931,000 square feet currently is under construction, representing a 10 percent increase to the market. According to Tom Phillips, CCIM, of the Blettner Group Ltd., the occupancy rate in Madison is 92 percent, and he foresees that “continued movement of businesses to office parks that offer on-site employee services and amenities” will be the trend in the Madison market.
“It is hard to get multifamily development approved in many area communities” in southeast Wisconsin, reports Patrick D. Gallagher, CCIM, of Siegel-Gallagher/Oncor International in Milwaukee. The lack of supply contributes to an occupancy rate of more than 96 percent. Ogden reports that lease rates range from 80 cents psf to $1.60 psf per month in Milwaukee and have increased steadily over the past three years. He believes that the “market will be very strong going forward.”
In southeast Wisconsin, “The retail market continues to be strong with a lot of various types of development,” Braden reports. Annual lease rates range from $10 psf to $12 psf for strip centers, from $12 psf to $16 psf for neighborhood centers, and from $16 psf to $20 psf for specialty or regional malls. Rates recently have risen due to a lack of available land in Milwaukee's western suburbs, he says.