Real Estate: A Tale of Two Industries

Unsold Residential Inventory Pops; Industrial Stays Tight

“Be very cautious,” is the advice of Jack Kyser, Chief Economist for the Los Angeles Economic Development Corporation.

Unsold new housing inventory in L.A. County “popped” from 1,115 units in 2005 to 3,630 in 2006. Subprime lenders, such as New Century, have gone bankrupt and the subprime industry fallout is having an effect on the Orange County office market.

The California housing market has “dialed back dramatically”. We now have a 10 month supply of resale housing, compared to the usual 4 to 5 months.

Land prices are at record levels (think the unentitled Robinsons-May site in Beverly Hills selling for $500 Million—“the ultimate Beverly Hills teardown” said the L.A. Times) while the condominiums in the new Century City St. Regis are selling at $2,000 per square foot.

Be wary of “buzzwords” like ‘smart growth’ and ‘live/work space’

On the other hand, office vacancy rates are low and Mr. Kyser foresees that market continuing to be tight. The industrial market is the tightest in the nation at 1.8% and there is not much industrial construction. Industrial developers are competing with (and often losing out to) residential and retail developers for industrial land.

“We’re not looking at a meltdown”

Overall, Mr. Kyser, who was speaking at the Asian Business League’s annual Real Estate Conference, ended on an optimistic note. He believes that we have hit bottom and will see a slow recovery over 2007 and 2008. Although he believes employment figures may be inflated, he believes we are at full employment in Southern California and he does not foresee a meltdown.

He left the conference attendees with several things to think about relating to the real estate industry:

  • L.A. County’s residential market has performed better than most other counties in Southern California.
  • However, he worries that there is no land strategy or economic development strategy for L.A. County (“Where do we need to drive this bus?”).
  • Factors which will affect the economy: gas prices (“we’ve passed the peak”), housing market and subprime shake-out, Iraq, 2008 presidential campaign, immigration reform and a hot stock market.
  • Land and real estate costs are causing shifts in industry location (flight to more affordable locations)

I hope you have enjoyed this update from the top economist in Southern California. If you have a real estate question or find yourself in a real estate dispute, please feel free to call us.

Sincerely,

Laine T. Wagenseller
Wagenseller Law Firm