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California - The New Normal in Los Angeles County

by Scott Donald, Irvine, May 2012

Thanks to the real estate recession, Los Angeles County is dealing with a reduced property tax base and fewer tax dollars to spend on essential public services.

 

If the projections of a new study are on target, making do with less could turn out to be a long-term situation.

 

Blame it on Residential

 

Southern California's housing and homebuilding industries have suffered dramatic losses. According to the2012-2013 economic forecast and industry outlook compiled by the Los Angeles Economic Development Corporation, there are still numerous obstacles blocking the housing recovery, including:

 

  • Tighter lending standards

  • Many homeowners underwater on their loans

  • Short sales and foreclosures

 

Uncertainty about just how many foreclosures are still in the pipeline and how lenders will manage their inventories of foreclosed homes is exerting additional downward pressure on prices. In December, foreclosures in Southern California accounted for 32.5% of existing home sales. As bad as that sounds, it's still a vast improvement over February 2009, when foreclosure sales peaked at 58.5%.

 

Office Market Has Vacancy Issues

 

After showing improvement the first three quarters of 2011, the Los Angeles County office market closed the year right back where it was at the end of 2010. The average office vacancy rate was 17%. Net absorption for the year was negative 189,272 square feet. On average, the county's soft market pushed Class A asking rents down to $2.90/SF and discouraged new construction (see table below).

 

Vacancy rates will hold steady during the first half of 2012 but should start to fall during the second half of the year as the economy expands further and the labor markets improve. Asking rents are projected to remain flat, with landlord concessions widely available.

 

Changes in workplace organization will present a challenge going forward. The necessity of reducing office space during the recession taught companies to use less space per worker. This will slow the office market's return to health unless the pace of job creation picks up significantly.

 

Industrial is the Bright Spot

 

Los Angeles County's manufacturing and logistics industries, which are major users of industrial space continue to hold their ground. At the close of last year, the average industrial vacancy rate was 2.9% --the lowest industrial vacancy rate in the nation. New industrial space under construction totaled 531,390 square feet and net absorption for the year was positive.

 

The report says improvements in the industrial market will depend largely on growth in trade and manufacturing activity. Companies must weigh the cost of higher rents in Los Angeles County versus cheaper rents in outlaying areas that have the added cost of expensive gasoline to get goods from ports to warehouses.

 

Property taxes are Los Angeles County's largest source of local revenue. With the real estate recovery still limping along, it's unclear how long officials will have to deal with declining tax revenues.

Office and Industrial Building Permits Issued
in Los Angeles County (In millions of dollars)

 

 

Office

Industrial

2001

547

202

2002

209

225

2003

182

276

2004

307

178

2005

233

277

2006

241

182

2007

716

109

2008

446

135

2009

192

40

2010

133

56

2011

156

136

Source: Construction Industry Resource Board