One of the definitive conferences in the industry to gain an understanding of how commercial real estate is performing in the Los Angeles area is the annual RealShare Los Angeles show, where industry professionals gather to discuss the most important topics facing the industry in the region. GRS Group had a presence there when it took place late last month. Jeff Coyne, a business development director at GRS | Corteq, took time to discuss his thoughts on two specific sectors he concentrated on during the show, office and industrial real estate.
What were your impressions from of the conference of how office is holding up in the Los Angeles area?
After about six to seven years of recession, it seems like there is some optimism in the office sector. But not all news is great news. Some of the concerns are going to be the cost of operating, where the jobs to fill those offices are coming from and if those jobs will stay located in Los Angeles in the long term. Governmental centers have been a good driver for office in the past. That seems to be paring down and moving away in the Greater LA area, but space is being filled by growth in tech and media, which are really L.A.’s bright spots for the sector. Because those tech and media groups are being founded in Los Angeles, the seed is going to grow there, but then the question is – once they’ve grown, will they stay?
There is a lot of talk about the revitalization of downtown. Was there much talk of office improvement in that area?
Actually, it’s probably more along the lines of how office is changing. Rent per square foot, the traditional office metric, is now moving more toward rent per employee. For those who are re-upping leases, it’s pretty rare to see them expanding space. More likely, they’re downsizing and adding or maintaining their head count. So you’re looking at a drastic change in the design and the utilization of how office is being used. From a landlord/owner’s perspective, the dynamic is changing. They may still have the same tenant mix, just with lesser space leased and a differently designed and utilized tenant space than they’ve had in the past.
Were there any areas that were bright spots in office?
From what I understand from the panels, it is the Santa Monica and West L.A. areas. Media is an industry that is changing and growing, and those companies are staying in their traditional areas. The Silicon Beach area is a strong driver for new technology startups, which will eventually need more space. The short term upside for office properties seems to be in those areas.
Switching to industrial, the ports in Los Angeles and Long Beach seem to be doing well, is that correct?
When it comes to industrial in L.A., the conversation tends to start with the ports. One of the major metrics that people were pointing to is that container traffic has increased three to four percent. Inbound traffic at the ports is a good barometer of a healthy economy. And the health of the ports point to solid fundamentals for industrial as well. If container counts are up, then retailers are planning for stronger sales and making the investment to bring in goods. You can then extrapolate that companies are feeling better about the prospects for the economy as the port traffic starts to increase. As the economy expands, retailers need places to store and ship their goods, which is good news for industrial warehouse.
What about warehousing? Good news on that front?
Warehousing near the ports is doing very well. Locations around the port are running out of land and there are not that many places left to develop. One panelist stated there are 71 projects totaling about 25 million square feet that has come or is quickly coming on line. In 2014 it will be a little bit slower, and that’s due to a lack of land. Developers are hungry, and they would love to build and continue to have the ability to warehouse and distribute product coming in through the ports. Gross absorption around the ports is almost 29 million square feet, with vacancy below eight percent.
Tell us about the tenants wanting industrial space in the L.A. area.
All eyes are on the big-box retailers – the ones that are going to lease one million plus square feet of new product, the companies that will try to do same-day delivery in the area. Those are the tenants everyone wants but the available product to meet those needs is limited. The good news for warehouse is filtering down the product line however, as industrial absorption seems to be increasing everywhere. If you are relatively well located, and have a marketable asset to lease or sell, it is likely that in the current market you can do well.
So what was your overall takeaway from the show? Are things moving in the right direction for these sectors?
My takeaway was that industrial is a safe, if not exciting place to put your money. It’s going to be hard to get an office deal to perform well, unless you are a very savvy investor in that sector.
Jeff Coyne will be moderating a panel at Bisnow’s Second Annual Denver State of the Market event on April 30. Click here for more information.