Are we in a recession? Maybe, maybe not. The U.S. economy is expanding and is likely to show a 2% annual growth rate this Thursday. Picture taken from today’s WSJ article.
Recession Amid Economic Growth?
Category Archives: Market Trends & Indicators
Market trends, leading or lagging indicators. As it relates to industrial property.
Lease Activity Overshadows Sales
In the 2008 second quarter, 3.5 million square feet of building space was absorbed in the Central Los Angeles industrial market, similar to Q2 ’07. Here is the interesting point: space leased totaled 2,800,000 SF versus a paltry 751,000 SF sold – almost a 4:1 ratio. The credit crunch and high sale prices have surely placed a damper on the sale market even though sale prices are relatively stable.
Industrial Activity Slow But Steady
The Southern California industrial market continues to exhibit consistent demand for tenant space and strong occupancy levels. The five-county area, which consists of approximately 1.7 billion square feet of industrial space, maintained a low vacancy rate averaging approximately 3%.
The economic climate is posing many challenges to the Los Angeles county as well as the Industrial Market;p however, the fundamentals remain in place for strong performance in the marketplace.
Capitalization Rates for industrial investment properties hovered just below six percent. Vacancy remains low in the 3-5% range, but several points higher in the Inland Empire. Many brokers have seen a 20-30% decline in transaction volume and demand.
More specifically, Gross Absorption is 50% compared to a year ago, with 2008 Q1 at 2.2 million versus 2007 Q1 at 4.1 million for the Central Los Angeles area. The Central Los Angeles Market is the largest industrial base in Los Angeles County. The Central Market remains one of the tightest and strongest submarkets in the region with little if any new construction due to the high cost and low availability of land.
To some degree, reduced container traffic has contributed to the diminished demand. Containers handled at the ports of Los Angeles and Long Beach were down 5.6% and imports sunk 5.9%, while exports increased 22%. Lease rates have held steady though. Â Although, tenants are demanding more concessions in the form of free rent and tenant improvements.
CMBS Market in the Dumps!
Investors have showed minimal appetite for commercial mortgage backed securities (CMBS) in recent times with only $10 billion in US CMBS issues in Jan-Apr 2008. Volume is a fraction of the $79 billion in bonds that sold during the first four months of 2007 according to Commercial Mortgage Alert. The general consensus at the Commercial Mortgage Securities Association meeting in New York last week was that an estimated $50 billion of CMBS will be issued in 2009 versus $224 billion in 2007. This volume would put production in line with 2002 levels of $52 billion.
Experts say a likely upswing won’t occur until early 2009 at best at which point CMBS bond prices should be stable enough for investors to jump back in. However, CMBS fundamentals are quite healthy and the delinquency rate is only 0.35%!
As a result of the credit crunch, total commercial real estate transaction volume is off 74% YTD as of April 2008 compared to 2007 levels. Until capital is more readily available transaction volume will likely remain slow.
Rate of Return
The 12 month trailing average for capitalization rates in Los Angeles County is five and eight-tenths percent (5.8%) for industrial properties. This rate of return is only a few percentage points higher than competing commercial real estate investments such as retail, multifamily and office. Industrial properties remain to be a clear favorite among sophisticated investors.
In the state of California, the Los Angeles area completed $4.5 billion in commercial property transaction volume while the other major regions of California typically range from $.2 to $1.6 B.