Local Real Estate Market Continues To Improve In 2nd Quarter, But Jobless Rates Remain An Impediment
By Joshua H. Silavent - Staff Writer
August 28, 2012 - Most sectors in the Long Beach real estate market showed signs of improvement during the second quarter of 2012, with housing and industrial gains leading the way. But a true recovery remains dependent on job growth as California and the South Bay area lag behind national employment rates.
The statewide jobless rate in July fell to 11.2 percent, down two points from one year ago. In Long Beach, the rate is higher, at 13.1 percent, but still down from 14.5 percent in July 2011 – although up from the 12.2 percent rate of May and June 2012.
Sales and median prices of single-family homes have increased with the improving labor market and shrinking inventory. This is especially true in Long Beach, which had higher median sales prices and lower levels of inventory than the whole of Los Angeles County in July.
But demand is playing catch up.
“The level of demand isn’t where I think it otherwise would be in a more normal housing market, even with this low supply of homes,” said Robert Kleinhenz, chief economist with the Los Angeles County Economic Development Corporation (LAEDC).
Clearly, the housing market is on the mend, particularly as more high-end, non-distressed sales occur. But the state needs to add about 30,000 jobs a month for the next few years to reclaim those lost in the recession. Currently, the state is averaging just over 25,000 new jobs per month, according to Kleinhenz.
“At some point we’re going to see that unemployment rate needle move, even though it’s been going sideways for the last few months,” Kleinhenz said. When and if this happens, expect the housing market to begin its return to pre-recession levels.
The news is not as good on the consumer side for the multi-family apartment sector. Rents are rising in response to increased home sales, yet inventory remains extremely low and new construction is virtually non-existent.
The South Bay industrial sector has seen growth in both Class A and Class B leases and reflects growing consumer confidence, according to several local experts. Absorption rates are climbing and new construction is taking place.
The office and retail sectors remain weakest across Los Angeles County, Kleinhenz said. But growth in retail sales and the anticipated move of the Port of Long Beach administration offices is promising. “I think overall trend lines are positive,” said Gary Painter, director of research at the USC Lusk Center for Real Estate.
Still, Painter calls for cautious optimism.
“I don’t think anyone should expect rapid changes,” he said.
Residential – Falling Inventory Reveals Pent-Up Demand
“There is simply no inventory,” said Phil Jones, managing partner at Coldwell Banker Coastal Alliance.
As a result, pending home sales in the Long Beach area for July were up 48.7 percent and average sales prices increased 11.9 percent, year-over-year. Median sales prices jumped to $380,000 from $335,000 during that same time period.
“We are in a very, very tight supply environment right now and it’s fueling these prices,” Jones said.
Homes sitting on the market for more than six months had been the norm in the South Bay since the recession hit, but inventory has fallen about 20 percent in the greater Long Beach area over the last year, according to Tammy Newland, operating principal with Keller Williams Realty in Los Alamitos.
With less than two months of inventory currently available, the pent-up demand of the last few years is starting to emerge.
Newland said she is seeing multiple offers on homes, particularly those priced under $1 million.
But the luxury housing market also is returning to form. For example, the average sales price in Belmont Shore in July topped $1 million, Jones said. Seven-figure sales had largely been absent in the last three or four years.
In addition, low interest rates also have contributed to the uptick in sales, despite the fact that credit markets remain tight, Jones said.
So, for the first time in three to four years, the local housing market is seeing “move-up buyers,” Jones added.
The summer sales season typically makes or breaks the year for real estate companies, and 2012 has benefited from a flood of cash investors purchasing homes in bulk. “Everybody’s trying to get on the bandwagon right now,” Newland said.
Meanwhile, banks are holding onto foreclosed and distressed properties, systematically releasing them as they try to manage the improving market, Jones said.
“But we don’t anticipate values being depressed by a flood of REO (real estate owned) properties,” he added.
In addition, banks are no longer in a position where they have to negotiate so sharply on short sales thanks to improving sales prices, Newland said.
July proved positive for the housing market across the Golden State. Home sales and prices showed strong gains last month compared with one year ago, according to data released by the California Association of Realtors. Moreover, July marked the fifth consecutive month that median home prices rose in California.
Jones said he expects to see a continued flattening of available inventory, which will push sales prices even higher. So, too, will a stabilizing of the jobs market, he added.
“I’m relatively optimistic” that sales will remain consistent throughout the remainder of 2012, Jones said.
Apartments: Housing Sales Drive Up Rents
“We have not recovered as quickly” as the housing market, said Nancy Ahlswede, executive director of the Apartment Association, California Southern Cities Inc.
Though little new construction is underway in Long Beach in the multi-family housing sector, other than some rehabilitation projects for low-income families, newer properties are filling up with tenants and home sales are increasing. These forces are driving rents higher and vacancies lower.
“Probably the biggest challenge right now in the multi-family market is a lack of inventory,” said Steve Bogoyevac, an apartment specialist with Marcus & Millichap.
During the height of the recession, Ahlswede said vacancy rates approached 20 percent in the Long Beach area, but that number has fallen below 10 percent this year.
The bursting of the housing bubble a few years ago drove many homeowners back into rental units, and that’s where some prefer to stay.
“Renters in this day and age are actually just happy to be renters,” Bogoyevac said.
The importance of the housing market to an economic recovery is well documented. After all, the collapse of the market largely fueled the recession. But Ahlswede said the multi-family apartment sector also is a key indicator of consumer confidence and a stabilizing of the job market. She expects activity to pick up next spring.
Bogoyevac said he sees positive trend lines in the apartment sector despite the exceptionally low availability of inventory.
If 2006 was the high point, and 2008 the low point, Bogoyevac said the current Long Beach multi-family market lies somewhere in between.
That’s because, as Ahlswede explains, there are so many moving parts and variables affecting the local market.
“You really can’t apply a number across the board to Long Beach because of all the many sub-markets,” she said.
In many ways, she added, Long Beach is representative of the entire state.
Commercial: Healthcare Industry Driving Office Space Leases
“Without Molina [Healthcare] taking up space, we would have had a negative quarter,” said Robert Garey, senior director at Cushman & Wakefield.
The biggest gains seen in the office space market during the second quarter of 2012 came from the absorption of Class B buildings. Nearly 40,000 square feet of space was leased during that time, thanks largely to Molina Healthcare.
Other recent transactions include Verizon’s lease of 42,000 square feet at 4801 Airport Plaza Dr. Still, this figure is skewed, Garey said, because the company will vacate about 39,000 square feet of space at 5000 Airport Plaza Dr. in September 2013.
“I’m not going to call it a recovery,” Garey said. “On the surface it’s positive, but fundamentally there hasn’t been a shift, yet.”
Fortunately, however, things are not trending down.
Larger users, such as Molina, are primarily driving the market today.
“We don’t see the smaller users in the marketplace,” said Shaun McCullough, a broker with Lee & Associates.
That’s because there is greater vacancy in the multi-level office space market. In addition, major corporations are moving into refurbished Class B buildings.
“Everybody’s salivating for the few deals that are out in the market today,” McCullough said.
There is limited inventory in Downtown Long Beach, he added, which helps explain why the suburban market outpaced the downtown market by nearly 20,000 square feet of positive absorption in the second quarter. Meanwhile, rental rates in both markets remained essentially flat, according to a survey recently published by Cushman & Wakefield.
Looking forward, McCullough said that he anticipates the Port of Long Beach will soon make a decision about where to move its administration offices, which has boiled down to either 4801 Airport Plaza Drive or the One World Trade Center downtown. The port staff require about 170,000 square feet of office space.
“Everybody’s been waiting for that,” he added.
As reported first in the Long Beach Business Journal, Legacy Partners, owners of One World Trace Center, have proposed a private-public partnership with the port and City of Long Beach to purchase the 27-story office tower.
But the biggest key to improving the office space market is job creation, Garey said. And though it may be slow going right now, he’s hopeful that a turnaround is coming.
“We’ve found bottom,” Garey said. “This too shall pass.”
Industrial: Demand Up For Class A and B Buildings
“I think what the industrial market is telling you is something not just about the real estate market,” said Lance Ryan, vice president of marketing and leasing for Watson Land Company. “What it’s telling you is about consumer confidence.”
With demand rising for both Class A and Class B industrial buildings, it appears that businesses, particularly logistics and distribution companies, are reengaging Southern California’s import and export market. Ryan said the holiday season for these businesses begins in May and June, which explains why he has seen increasing demand for short- and long-term occupancy rates.
For example, Watson Land Company is currently constructing a Class A 216,000-square-foot complex, known as the Legacy Building 106, in Carson without having first lined up a buyer. But the building, which includes cross-dock loading, 42 trailer storage spaces and LEED certification, has generated tremendous interest thus far, Ryan said. It is scheduled for completion on November 1.
And because rates have been so low in recent years, the industrial sector has seen a flight to Class A purchases lately, as more businesses seek an upgrade in quality and location while the getting is good. But the upturn is not limited to higher-end buildings.
“We’ve really seen a strong recovery in Class B space” throughout the South Bay, Ryan said, as rates are beginning to firm up, and concessions and vacancies dwindle.
Brandon Carrillo, an agent with Lee & Associates, said he expects to see another surge coming in the third and fourth quarter of 2012, much like what occurred in the fourth quarter of 2011 and first quarter of this year, thanks to a healthy stock market and the holiday sales season.
“In the second quarter, we basically hit a soft patch,” Carrillo said, but many good deals are pending.
During the height of the recession, absorption rates plummeted, Ryan said. Some industrial buildings took 12 to 24 months to lease.
“It was hard to see the end of the tunnel,” he added.
But things have changed. The market is picking up as exports increase.
“I think there’s pent up demand,” Ryan said.
Retail: Consumer Sales Up But New Construction Lags
Though retailers saw sales increase 0.8 percent in July, exceeding expectations to mark the first such jump in four months, vacancy rates remain high and lease rates soft throughout Southern California. Moreover, new retail construction is largely absent.
“Here in L.A. County, the two weakest [real estate sectors] right now are office and retail,” said LAEDC’s Chief Economist Kleinhenz.
But rising consumer confidence, evident in the purchase of new cars, appliances and greater use of credit, Kleinhenz said, bodes well for a recovery in the retail market. “[Consumers] are no longer as gun shy,” he added.
Painter, of the USC Lusk Center for Real Estate, said the general public is less worried about continued job losses, paving the way, perhaps, for more consumer spending.
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