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Real Estate Markets Moving In ‘Solid’ Direction As Recovery Continues

Housing Market Evening Out; Demand For Apartments, Industrial Space On The Rise

By Sean Belk - Staff Writer

June 5, 2012 - Residential and commercial real estate markets in Long Beach are in a more stable position this year compared to recent years, however some recessionary factors are still lingering, according to economists and local real estate professionals.

Consistent job gains, coupled with low interest rates, high affordability and a lack of inventory have increased demand for single-family home sales in the coastal region, creating a competitive climate in the first quarter, according to experts. The drop in property values seen since the start of the mortgage crisis may also be leveling off, but whether more distressed properties on the market may impact prices is still uncertain.

The hottest product type is the tightening apartment sector, which has seen declining vacancies and stabilizing rents attracting major investments. The office space market, meanwhile, continues to see positive absorption, while industrial space has remained strong since international trade business tied to the San Pedro Bay ports is expected to rebound this year.

“We’re certainly not worse than we were last year . . . and it appears as though we have a little more of a solid foundation in terms of the economic fundamentals,” said Robert Kleinhenz, chief economist for the Los Angeles County Economic Development Corporation’s Kyser Center For Economic Research.

Lisa Grobar, an economist and director of California State University, Long Beach’s Office of Economic Research, said the Southern California housing market is seeing more positive trends than negative ones. “In terms of fundamental things related to housing, almost all of them are working in the right direction,” she said.

But not all signals are upbeat. Unemployment rates remained relatively high in April, with Los Angeles County at 11 percent and Long Beach at 12.8 percent. Also, it’s uncertain how economic turmoil in Europe, a backlog of foreclosures and federal regulatory changes may impact financial markets this year, Grobar said. Although it continues to loosen, access to capital is still relatively tough to obtain for would-be homebuyers with damaged credit and businesses with weak balance sheets.

Still, Kleinhenz said jobless rates are slowly coming down. A total of 117,000 new jobs were added in Los Angeles County during the first four months of the year, he said. Improving employment figures locally, mostly seen in private education, motion pictures, technology, hospitality and healthcare, should inject more confidence into the housing sector this year as well as office and retail markets still suffering from high vacancies.

Additionally, many areas with a low inventory of homes should be able to absorb additional distressed properties, Kleinhenz said. The Los Angeles County median home price is projected to increase slightly this year as the market sees more traditional sales rather than transactions being dominated by investors and first-time homebuyers swooping up bargain deals.

“As we take a look at this year, what we’re going to find is a higher concentration of non-distressed sellers as well as non-distressed buyers entering the marketplace again,” Kleinhenz said. “It’s a reflection of people thinking that it’s safe to go outside again . . . that the economy is on the mend and has healed sufficiently.”

With rental rates on the rise, home ownership, in many cases, may soon become cheaper than renting in the long-term, Grobar added. Household formation is still far below pre-recession levels as many families have “bundled up” during tough financial times. But, she said, that trend may soon change due to a combination of “pent up demand” for housing and improving economic conditions.

Despite federal and state policies attempting to prevent factors that caused the previous sub-prime mortgage meltdown, Kleinhenz said the housing market is currently healing on its own. “A lot of tinkering took place on the policy and regulatory side and, at this stage, especially in the State of California, the market is doing its job,” he said.

Residential: Single-Family Home Sales Increasing

The single-family housing sector throughout California continues to experience a “low inventory” of homes on the market, according to local housing experts, who said consistent job gains and historically low interest rates have boosted consumer confidence in recent months.

Phil Jones, managing partner of Coldwell Banker Coastal Alliance, said lenders continue to put distressed properties on the market at a slow pace. With just a few months of supply, the local housing market could easily absorb an influx of low-priced homes, contrary to fears of price depreciation, he said.

“The so-called shadow inventory has been bantered about for nearly four years, [claiming] that it’s going to drive prices down, but it’s just never materialized,” Jones stressed. “It’s to the point now where we need it . . . We’re at such a low inventory that we could absorb it and not skip a beat.”

In Long Beach, pending home sales year-over-year were up 17 percent, while sales jumped 47 percent in April compared to the same month last year, according to the latest multi-listing service data. After years of declining property values, the city’s median home price increased 2 percent in April over the same time period in 2011, showing the first sign of appreciation in years, Jones said.

On a statewide basis, California’s median home price increased 1.6 percent in March from the same month last year, jumping 9.2 percent on a month-to-month basis, the largest such increase since 2004, according to the California Association of Realtors (CAR). In fact, CAR reports this year to be “the best start for the housing sector in five years.”

In an effort to deter further price declines, the Federal Housing Finance Agency wants to implement a REO (lender-owned properties) bulk sale pilot program, which would provide incentives to large investors to buy up blocks of distressed properties in Los Angeles and Riverside counties to be put on the market as rentals. But, at this point, CAR said the program is not needed in California.

Tammy Newland, operating principal and owner of Keller Williams Realty in Los Alamitos, said the housing market locally and throughout the state is ripe for both buyers and sellers. “Our market is solid at this point,” she said. “It’s still a buyer’s market because of the low interest rates. But, because of the lack of inventory, sellers are able to sell their homes in a much quicker time frame . . . however, sellers still need to price their homes to what the market can bear.”

Newland said Long Beach homes continue to remain the “cheapest coastal property” in the area with “a wide variety of offerings.” She said luxury home sales, which start at about $850,000, have also increased. Overall, Newland said the state’s median home price for the year is projected to raise about half a percent over 2011.

Increased demand has also been prevalent for the condo market, said Mike Dunfee, a realtor for Doma Properties. While condo prices have dropped by about half since 2005, he said sales this year in buildings from Downtown Long Beach to the peninsula should be ahead of last year.

Dunfee said short sales – where the lender agrees to accept a home price that is less than the amount owed on the property – typically takes longer to finalize and is the main reason for the low inventory and high demand. As a result, sellers are experiencing multiple offers per sale. “It’s not uncommon for us to have four or five offers on a listing down here, and that probably goes across town,” he said.

Scott Hamilton, founder and president of Doma Properties, said new high-rise developments should be built in coming years, but the current market still presents challenges for developers. “There needs to be a higher sales price on these units to make money and it’s about getting the financing on it,” he said. “Those are major hurdles that the development [market] has to clear.”

Aubry at Alamitos Ridge, the newest set of single-family units being built by Lennar Homes along Redondo Avenue just north of Pacific Coast Highway, should be fully completed by August, said John Baayoun, division president for Lennar. He said there are only five homes left for sale since construction of the community of 85 units commenced a couple years ago. “The response has always been very positive and we’ve had a great deal of success in attracting traffic and potential buyers,” Baayoun said. “We believe that the Long Beach market is a great market to be in and obviously one that is not served enough with new construction.”

Apartments: Rents, Occupancy On The Rise

The multi-family sector, meanwhile, has seen occupancy and rental rates on the upswing throughout the local region. Apartments have recently dominated the construction sector in Southern California, with multifamily permits up 50 percent in March over the same month a year ago, according to the Building Industry Association of Southern California.

Eric Christopher, apartment specialist for INCO Commercial, said apartment investor confidence began to increase last year after a shift from homeownership to rental housing, due mainly to more single-family foreclosures.

Apartment occupancy has since risen steadily and, in recent months, rents have begun to climb in some local areas, allowing banks to lend more to investors, who are attracted to historically low interest rates. As a result, there has been a flood of apartment property purchases, he said. “Right now is the utopia for buying apartment buildings,” Christopher said.

The 2012 Casden Multifamily Forecast released in April by USC’s Lusk Center for Real Estate, states that higher demand for rental units, dwindling supply and improved macroeconomic conditions are boosting asking rents, reducing or eliminating concessions and filling up units. Over the next two years, rents are expected to see continued growth, although the rate of increase is expected to slow down by 2013, according to the report.

In Long Beach, rents are still relatively flat, Christopher said, as opposed to Orange County, which is projected to see anywhere from 5 to 10 percent rent increases this year. However, as the job market improves, Long Beach rental rates should increase in the next one to two years. That would likely bring up apartment values as well, he said.

Steve “Bogie” Bogoyevac, apartment specialist for Marcus & Millichap, said rents in Long Beach are already rising, while higher demand is being pushed by a lack of quality inventory. He has seen a 20 to 30 percent increase in apartment sales this year over last year, with many multi-family owners now exchanging properties.

Some buyers are looking to invest in hard assets over the shaky stock market, Bogoyevac said. “The velocity of sales is picking up and prices are improving, so across the board it’s good,” he said. “You’ve got vacancies going down. Rents are stabilizing and in a lot cases in Long Beach going up.”

Commercial: Office Space Activity Up

Activity in the local commercial office space market began to pick up in the first few months of the year, with large blocks of prime vacant office spaces being quickly leased up, according to local real estate professionals.

In Long Beach, there was a slight positive net absorption in the downtown submarket, meaning more tenants were moving in than moving out, according to Cushman & Wakefield’s first quarter report. With an overall occupancy rate of about 83 percent, the downtown market saw Kardent Design take 5,583 square feet at the 11 Golden Shore building and Street Surfing Worldwide sign a lease for 5,773 square feet at 200 Pine Ave. Also, the near 30,000-square-foot Arts Building at 236 E. 3rd St. is being leased by Cardinal Career College, which provides programs in medical assistant training and cosmetology.

Bob Alperin, senior director for Cushman & Wakefield’s regional office, said for the most part big blocks of vacancies are starting to fill up with new tenants signing leases and expanding operations in recent months. He said the growth should continue to consolidate in the second quarter and accelerate further in the next two years.

“I think we’ve seen the market stabilize and the worst is over,” Alperin said. “We may be benefiting from some reorganization within some companies . . . and a little expansion from some existing tenants in the city.”

In the suburban submarket, near the 405 Freeway and Long Beach Airport, Boeing has already vacated two large office buildings at the Long Beach Airport Business Park and is expected to leave another 150,000 square feet at 4900 and 4910 Airport Plaza Dr. by the end of the year.

Shaun McCullough, principal and senior vice president of Lee & Associates, said large tenants have already signed deals to move into the building located at 4811 Airport Plaza Dr. vacated by Boeing last year. The Long Beach VA hospital has already signed a lease to move administrative and network logistics staff into the entire sixth floor, totaling about 25,000 square feet. Verizon is also moving into the building, taking up two floors totaling about 44,000 square feet. According to Verizon spokesperson Mike Murray, 170 company employees are relocating to the site from Santa Monica. Murray said these employees work for the firm’s multi-lingual sales and service center. Move-in is expected by August.

McCullough said the entire building should be fully leased by the end of summer.

Overall, McCullough said larger users are dominating the office market and filling up space quickly, and there are fewer small – 1,000- to 5,000-square-foot – tenants in the marketplace. “I think it’s only going to go up from here,” he said. “You’re going to have less vacancy over the next 12 to 18 months . . . And I think there is a larger audience of bigger users in the marketplace to take advantage of the deflated prices.”

Demand for medical office space from the local healthcare-related industry continues to pick up, with some physicians and doctors now more willing to move out of traditional campus areas to more high-end product, primarily in Bixby Knolls and North Long Beach, McCullough said.

Additionally, nearly all of the new office buildings near the Long Beach Airport at the developing Douglas Park business hub are now under contract. One of the most recent tenants, Airgas West, relocated in February from Lakewood to a building at 3737 Worsham Ave., which has been on the market since 2008. The company now has about 180 employees working at the facility and is expected to host a grand opening celebration on July 26.

June 5, 2012 – Airgas West recently relocated its operations from Lakewood to a new regional
headquarters at 3737 Worsham Ave. at Douglas Park in Long Beach. The company, which
distributes industrial, medical and specialty gases, welding supplies, safety products and
tools online and through over 700 locations nationwide, purchased the building for $5.7
million and now has 180 employees working at the facility. Airgas was represented by Bob
Alperin and Robert Garey of the Long Beach office of Cushman & Wakefield, and the seller
was represented by Rick Warner of CB Richard Ellis. Another 170 jobs are coming soon to
Long Beach when Verizon relocates its multi-lingual sales and service center from Santa
Monica to 4811 Airport Plaza Dr. at the Long Beach Airport Business Park. For the latest
news about the real estate industry, see Section B and the Business Journal’s Real Estate
Quarterly. The Long Beach Commercial Real Estate Council’s Annual luncheon is this Thursday,
June 7, at the Westin Long Beach. For tickets or more information, visit www.lbcrec.com.
(Photograph by the Business Journal’s Thomas McConville)

One major deal that has impacted the office market was the purchase late last year by Molina Healthcare of ARCO Towers. Now called Molina Center – located at 200 and 300 Oceangate on Ocean Boulevard – the national healthcare provider plans to backfill most of the complex with its own employees. This may necessitate firms currently leasing space there to relocate to other Long Beach office buildings once their lease is up.

Another potential game changer is the Port of Long Beach, which has plans to take up at least 170,000 square feet of space to relocate its administrative staff since its current building is seismically deficient and outdated. So far, the port has released a request for information, receiving proposals from close to seven building owners, located from downtown to the airport. Currently, the plan is to relocate to a building on an interim basis before deciding on any plans for a permanent location.

Retailers More Upbeat, But Cautions Remain

Following previous years of inactivity and large vacancies hitting the market, the retail real estate sector is starting to firm up slightly, with retailers, developers and shopping center owners more upbeat this year. But local real estate experts said tenants are still cautious in the current economic climate.

Brian Russell, vice president with Coldwell Banker Blair Commercial Westmac, said the retail market has gained confidence this year. But asking rates may continue to edge downwards due to high vacancies persisting in some areas, such as Anaheim Street, Atlantic Avenue and Long Beach Boulevard, he said.

Most regional and national brand retailers, such as Best Buy, Fresh & Easy Market and Petco, are now shrinking their footprint with new models of smaller stores to cut operational costs, Russell said, while some chains, such as Starbucks, are still cautious about expanding locations. “I think people are making some intelligent growth decisions, instead of just growth for growth’s sake,” he said.

In East Long Beach at the Los Altos MarketCenter at Bellflower Boulevard and Stearns Avenue, Memorial Care Health System will take over a two-story, 30,000-square-foot building, formerly occupied by a now-defunct Borders bookstore. The medical provider is expected to open by fall, according to a brochure by property owner Cousins Properties. In addition, Russell said more optometrists and orthodontists are moving into retail spaces.

Meanwhile, some local automotive dealerships have repositioned in recent months. Mitsubishi of Long Beach, which has been located along the Traffic Circle for years as a major sales tax revenue generator for the city, recently moved to the Cerritos Auto Square, leaving a large empty lot. Another former auto dealership site located at 3399 E. Willow St. also remains vacant. Boulevard Cadillac, formerly Coast Cadillac, which moved to the Signal Hill Auto Mall, previously occupied the site.

Doug Shea, founder of INCO Commercial, said there are more calls for retail space in the last few months compared to last year; the biggest growth segments are outlet malls, shopping centers anchored by large grocery markets and “fast-casual” dining establishments.

The trends reflect the fact that consumer confidence in the retail market remains uncertain with the economic recovery moving at a slow pace and recessionary factors still lingering, he said. “People are still discounting and watching their dollars, so the segments that are growing kind of mirror that,” Shea said.

Industrial Sector: Sees Steady Improvements

The South Bay industrial market has seen steady improvements in the last two quarters, maintaining a healthy occupancy rate. According to a first quarter market report by Lee & Associates, the industrial sector has experienced positive absorption in recent months, with the overall vacancy rate declining to about 5.2 percent.

Brandon Carrillo, an industrial real estate agent with Lee & Associates, said sales and lease activity of industrial and warehouse property surged in the first few months of this year. While he expects the momentum to slowdown in the second quarter, overall users are making more purchases while property prices remain low.

“There are a lot of deals pending, especially this year, and I’m dealing with a lot more sales than last year,” Carrillo said. “I think many more people are realizing there’s an inflation problem that’s around the bend . . . and, with interest rates this low, it’s motivating a lot of people to take advantage of [pricing] and to begin moving on purchases.”

John Eddy, commercial real estate agent specializing in the industrial market for Coldwell Banker Commercial Blair Westmac, said demand for industrial space in the Long Beach area continues to increase as vacancies, for the most part, hit bottom at the end of last year and there’s a shortage of distribution centers in the area.

“We’re seeing very positive signs in terms of the industrial side in the last three months,” he said. “Our business has picked up considerably . . . I think we’ve hit bottom and by the end of the quarter we’ll probably see some adjustments.”

Rental rates should begin an upward movement in the next quarter, while prices may increase within the next year, Eddy said. Although port cargo traffic has been lackluster in the last few quarters, international trade experts predict a stronger shipping season this year compared to 2011. Growth in imports and exports should help boost demand for industrial space this year, he said.

Recent industrial transactions in Long Beach include large conglomerate industrial lubrication system company Colfax Corporation taking up space, while family-owned aerospace company Neill Aircraft Company is expanding on the Westside, Eddy said.

Meanwhile, there’s about 2 million square feet of “Class A” industrial construction in the pipeline in the entire South Bay industrial market, some of which is being speculatively built at Douglas Park by developer Sares-Regis, and should be coming online by the fourth quarter, according to Lee & Associates.

Watson Land Company, for instance, is continuing construction of a 215,000-square-foot speculative building at 1000 E. 223rd St. in Carson, according to Lance Ryan, vice president of marketing and leasing for the industrial property manager and developer.

With a lack of supply for Class A product, he said demand from long-term tenants looking for new functional space, with redesigned aesthetic and interior features continues to increase. “We’ve already seen great interest in the market for the building . . . and we’re confident the market is going to receive this very well,” Ryan said.