LOS ANGELES-The industrial market in Southern California had a strong year in 2011 and will gain further traction in the next 12 months. The local office market, however, continues to inch forward toward improvement and may not reach pre-crash levels of either vacancy and lease rates until 2015, according to the Casden Forecast,  a project of the University of Southern California.  

More sobering was the news that rent rates are barely rising, and in some cases falling, in most of the office markets in the region. Regions that had no new construction often reported the best absorption and rental growth.

Optimism and uncertainty were two themes emphasized by USC economist Tracey Seslen, co-author of the forecast with Richard Green, director of the USC Lusk Center for Real Estate. Troubles in the Eurozone, political turmoil in the Middle East and a slow recovery at home all could influence the real estate market negatively.

“The black swan is everywhere,” says Seslen, referring to an economic theory that holds that unpredictable disasters are bound to happen, even if the possibility is very small.

“Risk is the ‘known unknown,’” adds Seslen, paraphrasing Donald Rumsfeld’s famous saying. Uncertainty, she says, is the “unknown unknown.”

Uncertainty aside, Southern California real estate professionals had some reason to cheer. The industrial market in Los Angeles, Orange and the two “Inland Empire” counties of Riverside and San Bernardino all had strong showings.

The Inland Empire industrial market was the star of the forecast. The region will see industrial rents rise 31.2% in two years to $0.42 per square foot monthly.  The region is also the first in Southern California to report the start of construction on a new “spec” industrial building, which is a sign of growing confidence in the market.

The LA industrial market, with a vacancy rate of only 2.9%, is “the tightest in the nation,” according to the forecast, which predicted rents to rise nearly 10% to $0.55 per square foot in the next two years.

In Orange County, industrial rents grew 10.4% in the past year to $0.74 per square foot, with the John Wayne Airport area leading the submarkets with $0.85 per square foot.

The Southern California office market is performlng less spectacularly than industrial, however. In the third quarter, Los Angeles County office buildings averaged 16.6% vacancy, while asking rents county-wide were $2.94 for Class A buildings and $2.27 for Class B.  The forecast projects stable vacancies and rising Class B lease rates in the next two years.

In Orange County, beleaguered by a 18.3% vacancy rate, Class A office space is going for a modest $2.17, compared to $2.25 a year ago. With a 20.2% vacancy, the John Wayne Airport market is the softest.  The good news is that Orange County is “leading Southern California in job creation, and by a wide margin,” says Seslen. That job growth means that vacancy rates in ‘The OC’ will fall 7.1 percentage points in the next two years,  although rents will also fall 3.3% in the same time period.

Even softer, unfortunately, is the office market in the Inland Empire, where the average vacancy rate is a squishy 23.8%, the highest in the region, while the asking rate for Class A space is $1.92. In the next two years, the region should expect Class A rents to decline 4.7%, while vacancies should drop to 4.3 percentage points to 21%.

The Casden Forecast is a joint project of the Sol Price School of Public Policy and the Marshall School of the Business, both at the University of Southern California.  

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