February 28, 1992 - From the February, 1992 issue

Economic Questions Loom Large for Planning in ‘92

The expected Los Angeles real estate market in 1992 is filled with many concerns. Kathleen Connell, Chair and Managing Director of the Center for Finance and Real Estate at UCLA and President of Connell and Associates, gives an outlook of the real estate market in housing, retail, office, and industrial.

The California real estate bubble has burst and many are predicting that it will be several years before confidence in the markets returns. As planners, City and County officials, developers, and lenders move into a new year, looming large are several economic questions. 

1991 was an historic low in the real estate industry nationally and even the normally robust California markets suffered. California-bashing in the national press has become vogue and writers delight in the high commercial vacancy numbers and stalled housing sales that now characterize many markets. The California development industry itself is still reeling from the extended period of sluggish markets, restrictive lending practices, an oversupply of product, and declining home prices and commercial rents. 

Will 1992 bring a partial recovery of the Los Angeles real estate market? Will lenders be prepared to ease the credit restrictions which severely limited development in 1991? Will massive infrastructure programs proposed by state and local governments provide the incentive to the construction industry needed to jumpstart the economy? Will President Bush’s aggressive real estate proposals promote home sales and new home construction, bolster the commercial resale markets, and encourage the infusion of credit by pension funds into real estate investments? 

Locally, two major events emerge as significant to the course of future development: the potential passage of a growth management or a regional planning bill by the State legislature and the selection of a Los Angeles Planning Director. Will legislation imposing regional planning provide a framework for a comprehensive approach to development and infrastructure, or will it create another political roadblock that delays but fails to improve the final product? Will the new City Planning Director encourage the City to reexamine its “planning by project” mentality and develop a vision for its future? 

Survey: Developers Pessimistic 

California companies responding to the annual 1992 UCLA Center for Finance and Real Estate survey of real estate development companies are increasingly negative regarding the industry’s five-year outlook.

Only 27 percent are optimistic regarding the five-year outlook for their own firms, compared to 54 percent last year. Twenty-two percent are pessimistic (23% in 1991) and 51 percent are cautious (23 percent in 1991). California companies are, however, more optimistic than their non-California counterparts. Only 13% of the non-California developers define themselves as optimists; 52% say they are being cautious; and 35% claim pessimism. 

Despite a more subdued attitude towards the future and a belief by over 50% of California executives that volume projection in 1992 will be less than 1991, California developers are still aggressive regarding new development: over three-quarters report that they will seek financing for new projects in 1992. Over two-thirds of California survey respondents forecast that single family residential markets will see the greatest improvement in 1991-92, over one third are positive regarding multi-family development (multiple answers were allowed), 17% list industrial markets, 10% retail and a resounding zero percent have confidence in office markets. 

Market Outlook: Housing 

The brightest prospect for recovery in 1992 is the single-family housing market, with recovery projected by the beginning of the third quarter. Housing inventory has steadily decreased and now is projected at less than 28 weeks. In certain submarkets, apartment vacancy rates are below 5% and new developments will be undertaken. 

The recent announcement by CALPERS to invest $225 million in single family developments, and President Bush’s proposal to offer first time homeowners both a $5,000 tax credit and the withdrawal of up to $10,000 in individual IRA accounts, should both provide new dollars for development and encourage homeownership.

“Affordable housing” directed at both the first time homeowner and the move up buyer will predominate. However, it should be emphasized that two negative factors still remain: lagging consumer confidence due to a soft job market and limited acquisition and development funding by financial institutions. 

Retail 

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With an estimated 2,000 mini-malls in Los Angeles County, continuing opposition from surrounding areas to the planned Marina Place project, and expensive land prices, retail development in the central L.A. area should be minimal this year. 

Local lenders report that they are uninterested in new retail projects unless they are small-scale mixed-use projects connected to residential development, or rehab projects to improve the viability of existing centers. Investor interest in retail is lagging and few forecast a recovery until 1993. New retail development is likely, however, in the Antelope Valley once the housing market recovers and tenant confidence returns. 

On the public/private development agenda, redevelopment-assisted projects in downtown Los Angeles and Hollywood are seeking City Council approval for financing this year. LACTC is gearing up its joint development activity, which may include housing, retail, and office facilities, and will become an increasingly active participant as transit construction in Los Angeles continues. 

Office 

Office development, the weakest market, will continue its painful profile until at least 1995. Vacancy rates, bankruptcies of major tenants, heated competition for new leases, reduced rents and attractive tenant improvement packages will make 1992 another good year for the tenant. 

The public sector is surfacing new projects for office structures, with RTD, LACTC and LAPD in various stages of planning for their headquarters buildings. Redevelopment agencies will be active in future office development with both Glendale and Burbank analyzing large-scale projects and the City of West Hollywood seeking to attract entertainment companies. 

Industrial 

Declining lease rates, inexpensive land costs in Riverside and San Bernardino County and scarcity of developable land suggest that industrial activity in the L.A. County area will continue to be an opportunistic situation with few new developments started. With an overhang of supply and the loss of 100,000 manufacturing jobs, the industrial/warehouse market should continue to be bargain hunting territory for tenants, attracting some new mid-sized factories to the region through low rents and desirable spaces. 

Conclusions

Development opportunities in the next three years will continue to be limited in all markets but residential. Credit for real estate will continue to be restricted, unless risk-based lending criteria is reevaluated by federal regulators. Development companies will require significant levels of equity and strong balance sheets to be credible players in increasingly downsized and competitive markets. 

State and local government will assume increasingly important roles as they promote infrastructure and economic development projects that can propel job growth and thus demand for real estate. The private sector will increasingly seek public sector financing (assessment districts and Mello-Roos bonds) to support development activity. However, new regulations on disclosure and standards for appraisals as they relate to Mello-Roos bonds may be proposed at the State level. Overall, the expansive climate of the 1980’s will not return in the early 1990’s.

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