The University of Southern California Lusk Center for Real Estate presented its annual analysis of industrial and office real estate in Los Angeles County, Orange County and the Inland Empire, which shows signs of a slow market recovery. According to the 10th Annual Casden Southern California Industrial and Office Forecast, all three areas experienced job growth and increased demand for both property types in 2011. An analysis of each area’s submarkets found lower vacancy rates in 11 of 17 office submarkets and 11 of 14 industrial submarkets. On the rent side, four office submarkets and eight industrial submarkets experienced increases. Overall, declines were smaller than in the previous two years.

“Although Southern California is a long way from pre-crisis levels of economic health, the improved employment picture and profound turnaround in the industrial market are signs of a slow recovery,” said study author Tracey Seslen. “The office market is only slightly improved over last year and vacancy rates may continue to fall for many months before we see rents stabilize.”
As a result, while office demand is expected to grow over the next two years, office rents were down for the third straight year and will continue to decline. On the industrial side, all three markets are expected to see ongoing declines in vacancies and increases in rents over the next two years.

In particular, the Inland Empire’s industrial market – the top performer in 2011 with a 6.4 percent increase in rents and nearly 17 million square feet of net absorption – is expected to see more growth in the next two years, but the magnitude will depend on rail and port activity. “Sovereign risk in Europe, geopolitical turmoil and the growing U.S. debt crisis are undermining consumer confidence. Port and rail traffic, particularly activity at the Port of Long Beach, is down and could hinder the positive outlook for industrial rents,” Seslen said. The forecast analyzes economic data provided by Grubb & Ellis on rents, vacancies and transactions for office and industrial markets in Los Angeles, Orange, Riverside and San Bernardino counties.

The forecast’s key findings by market include:

Los Angeles County

• Unemployment fell 0.7 percentage points to 11.9 percent in 2011.
• In 2011, the office vacancy rate fell 0.4 percentage points to 16.6 percent, Class A rents decreased 2.3 percent to $2.94/SF, and Class B rents rose 1 percent to $2.17/SF.
• Over the next two years, office vacancies should remain stable while Class A and B rents are expected to decrease 7.7 percent and 7.3 percent, respectively.
• In 2011, L.A. remains the tightest industrial market in the U.S. with vacancy rates falling to 3.1 percent (0.2 point decrease) and rents declining by only a penny to $0.50/SF.
• Over the next two years, industrial vacancies are expected to decrease .4 percentage points to 2.7 percent and rents are expected to increase 9.8 percent to $.55/SF.

Orange County

• Unemployment fell to 8.5 percent in 2011, which is the lowest of the three markets.
• In 2011, the office vacancy rate fell 2.4 percentage points to 18.3 percent, Class A rents fell 3.6 percent to $2.17/SF and Class B rents fell 2.2 percent to $1.75/SF.
• Over the next two years, Class A vacancies are forecasted to decline 7.1 percentage points to 14.7 percent, while rents decline 7.2 percent. Class B vacancies are expected to drop 4.3 points to 12.3 percent, while rents should decline 2.9 percent next year, but regain much of that loss the following year.
• In 2011, industrial vacancy rates fell 1.3 points to 5.3 percent and rents increased 10.2 percent to $0.74/SF.
• Industrial vacancies are expected to decline one point to 4.2 percent over the next year and remain stable the following year. Rents are expected to increase 16.8 percent over the next 24 months to $0.86/SF.

Inland Empire

• Unemployment fell 1.1 percentage points to 13.3 percent in 2011.
• In 2011, office vacancy rates remain the highest in the region at 23.8 percent (a 0.1 percentage point decrease) and Class A rents fell by 6.3 percent to $1.92/SF and Class B fell 2 percent to $1.47/SF.
• Over the next two years, Class A rents are expected to decline 4.7 percent, while vacancies should decline 4.3 percentage points to 21 percent. Class B rents are expected to decline 9.6 percent and vacancies are expected to drop 1.6 points.
• In 2011, industrial vacancies fell 4.2 percentage points to 6.6 percent, while rents rose 5.7 percent to $0.33/SF.
• Over the next two years, a 31.2 percent increase in industrial rents is expected to being rents to $0.42/SF, while vacancies are expected to decline by 2.5 percentage points.

This article has been provided courtesy of RENTV: www.rentv.com