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A Tale of Two Cities
Southland Regional Association of Realtors

The rule of thumb used to be that commercial real estate recovered two years after the broader economy started improving. Not this time.

The recovery continues at a languid, inconsistent pace well below historical standards - with GDP under 3 percent for nine straight years. Yet within that tepid improvement there have been some clear winners.

Surprisingly, "Californians number ten on the list of fastest growing states. That's what the data says," said Dr. Lawrence Yun, the chief economist of the National Association of Realtors and the keynote speaker at Tuesday's Commercial Real Estate Forum presented by the Commercial Real Estate Division of the Southland Regional Association of Realtors. Jan Perry, general manager of the L.A. Economic and Workforce Development Department, and Greg McWilliams, president of Newhall Land and Farming Co., were the two other panelists.

"But job creation," Yun continued, "has been principally in the Bay Area," driven by the "high skill set of the employees."

From 2010 to 2014, Northern California created enough jobs to fill four stadiums.

Los Angeles, by comparison, is well along the recovery path, but it's a much slower slog. Nationally, the economy has added 8 million jobs, enough to make up what was lost, but not enough to meet demand of new graduates.

What's happening in commercial real estate is not all that different from the issues hampering a more robust recovery of the general economy. Northern Cal does fine; SoCal limps along. Big banks, awash in cash, fund mammoth commercial real estate purchases, but home builders cannot get construction loans. Small lenders and local credit units are frozen in place, like so many deer in headlights, fearful of a visit from a regulator, aware that only half of the Dodd-Frank regulations have been implemented. Huge corporations have stashes of cash, like so many "Breaking Bad" dealers, with easy access to inexpensive loans, while mom and pop bakers can't get bucks for a new oven. Big commercial real estate brokers sell $430 billion worth of properties priced over $2.5 million, which investors from around the world covet; small commercial brokers can barely cobble a deal together for properties under $2 million.

Then there are the usual tropes: the 1 percent compete for the largest yacht; the working poor can't pay rent on minimum wage, while the middle class wonder if the class even exists. It truly is a tale of two recoveries.

If this recovery had followed previous patterns, Yun said, each of us might be $4,700 richer, and that would have gone along way toward pumping up the economy. That's the $1.3 trillion difference between having a GDP consistently above 3 percent, as in past recoveries, and not the below 3 percent of the past nine years.

It's also why, Yun said, some parents believe their kids, who are drowning under student loan debt, will not have the same opportunities they had, even though household net worth is at an all-time high.

"The good news for commercial real estate," Yun said, "is that you're in the sixth and seventh year and prices are turning positive.

"Big commercial real estate deals peaked in 2007 at $571 billion, then plunged to 67 billion at the depth of the Great Recession. Last year it was at $355 billion, and Yun projects it will rise to $430 billion by 2016. Even small commercial brokers said in a survey during the first quarter of this year that they were more optimistic. Sales volumes were up 11 percent, prices posted a positive number-albeit 1 percent is nothing to rave about - leasing was up 5 percent, and rental rates rose 2 percent. As vacancy rates continue to fall, rents and prices will rise. Office vacancy rates have stayed high as employers cram more workers into smaller spaces, but Yun said, the trend that has 30 workers stuffed into space once reserved for one has hit its limits.

"Rather than giving a cubicle, even residential real estate firms are giving agents a $100 computer bag that is their portable office for use in a common space. But soon they will need more space. "Higher density and micro-living spaces also may gain popularity in Los Angeles as rents continue to rise, with the average apartment rent around $1,500, and the vacancy rate at 3 percent and dropping lower. "Owners can charge higher rent because tenants have nowhere to go," Yun said, noting that California historically has had a housing shortage with nothing in sight to alleviate it.

Yun said the future for commercial real estate is relatively bright, even with the persistent dichotomies - except for one black cloud on the horizon, the one over Washington, D.C. The linkage between commercial and residential real estate is more than jobs, which generates home sales. It's time, Yun said, for residential brokers to throw their political weight in with their far fewer commercial brethren in an effort to stave off potentially devastating legislative changes - such as the proposed elimination of 1031 tax deferred exchanges, and the need to preserve terrorism insurance for commercial structures. "Realtors underestimate the power of their interest group," Yun said, insisting that has to change. Everyone has an interest they want preserved, he said, except the dead.





2013 Real Estate Symposium Articles

Balance Needed in Downtown L.A. Urbanization Part 1

Essential to Plan, Avoid Big Surprises Part 2

FAR is Key to Success for Commercial Investments Part 3

Battling Bedbugs and Bad Tenants Part 4
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