Apartment, Industrial Sectors Prime Movers; Home Prices Falling, But Sales Increase

By Sean Belk – Staff Writer

March 27, 2012 - With signs of an improving economy beginning to take hold and a somewhat better jobs picture, real estate sectors in Long Beach are slowly on the mend, according to local economists and real estate professionals. While apartment and industrial markets are leading the charge, it might be a little while until a full-blown economic recovery.

Unemployment rates, although better than last year, remain relatively high. Such is the case in Long Beach where the jobless rate is still above 13 percent. Although home sales have increased, most transactions are propelled by falling prices due to more foreclosures and short sales on the market. Commercial activity has also picked up, but large vacant spaces persist. Overall, growth is expected to be at a modest pace this year.

 

“I’m not all that optimistic that the recent data is a beginning of a longer term trend . . . I think we have a couple headwinds in the national economy that will slow down growth,” said Joe Magaddino, director of the California State University, Long Beach Office of Economic Research. “Overall, we’re looking for modest growth for the year.”

The upbeat momentum, however, is mostly coming from strengthening apartment and industrial sectors, while office and retail markets, although weak, are also experiencing some positive absorption.

While single-family home prices are still in a tailspin due to downward pressure from distressed sales, real estate experts said the housing market has or is likely to hit bottom this year. Locally, housing inventory remains low and demand continues to pick up, while investors are now swooping up blocks of bargain home sales.

Gary Painter, associate professor and director of research at USC’s Lusk Center for Real Estate, said home prices should stay relatively flat this year, as the housing market continues to shuffle through an inventory of underwater properties and distressed sales. That may change, however, if unemployment rates improve further, which would add confidence for standard sellers to get into the market.

“Once people are more confident about the job market, people who may have been delaying putting their house on the market will feel like it’s a better time to do so,” he said. “Economists are predicting that the recovery will continue, which is good news . . . It’s just a matter of the speed of recovery.”

Also, Painter said an improving apartment sector is typically “the first sign of health in the housing market,” since the more rents go up, the more attractive single-family homes are to buyers. “The pressures in the rental market will help push people into buying their first home, and then the job market will encourage people to go ahead and make those investments where they may not have otherwise,” he said.

Magaddino said employment losses are much smaller than they had been in earlier periods during the recession. However, home price declines caused by distressed sales should be “troublesome for the next couple of months” since banks have delayed an orderly transition in the market.

Sustained job growth in Long Beach would help accelerate the housing recovery, he said, with major, long-term development projects at the port, airport and other areas expected to add local opportunities for employment.

But Magaddino said a major looming factor is the fate of Boeing’s C-17 production facility, which, if closed, would impact thousands of local workers. “The reality is the production line can’t go on forever . . . and, because Boeing is such an important employer in the City of Long Beach, that’s going to be a pretty big hit,” he said.

Household formation is still down significantly from previous years, Magaddino said, adding, “in a year or two, we could be in a situation, where there’s a lot of pent up demand for housing and the housing market is much more brisk than it is today.”

Residential: Investors Stimulate Home Sales

With the median single-family home price continuing to drop in Long Beach and other cities across the state, demand has picked up as some homebuyers and investors take advantage of lower prices and historically low interest rates.

In Long Beach, sales of existing single-family homes jumped 52.5 percent in February over the same month last year, while the median home price was down 7.5 percent on a year-to-year change, according to statistics provided by the California Association of Realtors (CAR).

Geoffrey McIntosh, residential broker and owner of Main Street Realtors, said the statistics show that demand for homes is improving, but housing inventory remains low. He said the months of inventory for homes on the market in Long Beach is close to 3 months, which is about half the normal industry standard.

“People are very interested in buying, but there’s far more buyer demand than there are willing sellers,” McIntosh said. “People never really stopped looking over the holidays, as they customarily do, since they perceive this as a good buying opportunity and they’re anxious to get into the market.”

As homebuyers enter the selling season this spring and summer, he expects buyer demand to increase. Additionally, home prices should remain relatively flat this year, while downward pressure from distressed inventory should start to dissipate by 2013, McIntosh said. CAR predicts the state’s median home price to stabilize this year, possibly edging up 1 percent.

The increased sales activity, however, is most reflective of more private investors buying up bargain properties, said Terry Ross, broker and owner of TR Properties, and a long-time real estate columnist for the Business Journal. Recent reports show a record 27.9 percent of resale homes in Southern California last month purchased by investors, he said.

In fact, the federal government recently unloaded a plan, encouraging investors to buy homes in bulk and then rent them out, as a way to alleviate distressed properties that continue to pull down property values.

“Basically, you have investors coming in just to get bargains,” Ross said. “I think they’re buying, because they see rent is so strong, they can make money . . . They’re looking at this as an investment, not to just buy a home.”

However, investor sales aren’t considered much of a signal of a recovering housing sector, he said. “I don’t know if that’s a really strong market, because usually when you see more sales you see prices going up; supply and demand . . . and this is kind of the antithesis of that,” Ross noted.

Larry Boren, broker and owner of LB Brokerage, Inc., said values are still higher in East Long Beach than North Long Beach, but home prices overall have dropped anywhere from 20 to 50 percent from five years ago. He said the spread between sales and prices have discouraged some homeowners from “moving up” to new digs.

Although single-family homebuyers have been attracted to lower property values and interest rates, foreclosure and short sale transactions can take months after lender evaluations and credit checks with banks that are still nervous about future defaults. Although banks have eased up a bit on standards, Boren said criteria for loans are still tough.

“It’s a great time to buy because the payments are the lowest, but qualifying is the hardest,” he said. “Even though there are more people looking, rents are the same as owning, prices have dropped and people who haven’t bought in the last five years have money; getting in is hard.”

Apartments: Rents Rising As Vacancies Firm Up

The multi-family apartment sector continues to show widespread improvements, as property owners are more comfortable raising rents since vacancies continue to decrease, according to real estate reports and experts.

Although rents in January were relatively flat in Los Angeles County compared to the same month in 2011, rents in Orange County jumped 13.2 percent, according to a recent rental index report by real estate Web site Zillow.com.

According to Eric Christopher, apartment broker for INCO Commercial, Long Beach – which has historically been recognized as having one of the lowest vacancy rates in L.A. County – is poised to see rent increases by the end of the year.

Strengthening market conditions and low interest rates have spurred a flurry of multi-family purchases in recent months, with investors trading and snatching up properties. Apartment sales volume is up 34 percent from last year, he said. “We’ve got pretty heavy demand right now,” Christopher said. “Anything that’s got decent quality to it is flying right off the shelf.”

Apartment vacancies have filled up mainly due to the improving employment picture and more people leaving homes due to foreclosure. L.A. County, which is geographically bigger and has a more diverse industry sector than Orange County, typically takes longer to see employment gains, he said.

But, vacancy rates in Long Beach should continue to improve because there are more opportunities for job growth and new development than in some other cities in the county, Christopher said. Prices for multi-family properties should eventually edge up as well, but that won’t happen until rents show stronger increases, he added.

Steve “Bogie” Bogoyevac, apartment broker for Marcus & Millichap, said, in some cases, management companies have already been asking property owners to increase rents in Long Beach, although some still fear a loss of tenants. “Some owners are going to say ‘let’s just leave it the way it is, I don’t want to rock the boat,’ where other owners might be a little more okay with small increases to test the waters,” he said.

With the volatile stock market, people are looking to put their money in hard assets, and it’s a good time for property owners to investigate trading, refinancing or selling in today’s market, Bogoyevac said. “A couple of years ago you didn’t have options like we have,” he said. The big challenge, however, is there isn’t enough inventory in the market to buy.

Office: Large Vacancies Drive Tenant, Buyer Interest

Although many office buildings in Long Beach still have empty space left from the downturn, some higher-end Class A buildings are firming up with the improving economy. Large vacancies that went on the market last year have drawn more activity from buyers and tenants to move into the area, according to local real estate professionals.

The downtown submarket, which has a total vacancy rate of about 18 percent, netted a positive absorption of 30,919 square feet in the fourth quarter of last year, meaning more tenants moved in than moved out, according to the latest market report by Cushman & Wakefield.

The most recent significant leases downtown include executive office provider Regus moving into 18,399 square feet at the Landmark Square building and URS Corporation signing for 11,928 square feet at Catalina Landing.

At the 200 Pine Avenue office building, Street Surfing Worldwide, which manufactures and distributes wakeboards, skateboards and scooters, recently relocated its headquarters there from Irvine taking up 5,774 square feet. This comes after tech company Ignify moved in last year, taking 10,597 square feet.

In the suburban submarket by the 405 Freeway and adjacent to Long Beach Airport, however, Boeing continues to leave a substantial hole in the market after deciding to relocate operations from leased buildings to its own property in order to cut costs.

In the last two years, the aircraft manufacturing company has vacated two buildings at 4801 and 4811 Airport Plaza Drive. By the end of the year, Boeing is expected to leave another office complex, which was converted from two buildings, at 4900 and 4910 Airport Plaza Drive, said Bob Alperin, senior director for Cushman & Wakefield. In total, the exodus is expected to have put 500,000 square feet on the market by fourth quarter.

The large chunk of available space has now driven a rise in interest from regional buyers and tenants looking to relocate to the area, he said. Alperin said there appears to be more interest in the suburban market rather than downtown because the area appeals to a broader range of businesses attracted to the easy freeway and airport access. Depending on potential forthcoming transactions, he added that lease rates should stay relatively flat but may increase a bit in higher-end buildings.

“We’re starting off the first quarter with a decent amount of activity in the suburban market,” he said. “There aren’t too many of those kinds of opportunities available, so when you have big space, big space gets leased. We are optimistic that will attract somebody to the market who will be able to call Long Beach home.”

Shaun McCullough, office broker and principal for Lee & Associates, said the large empty office vacancies have brought new interest to the area. He said the 4801 Airport Plaza Drive building formerly occupied by Boeing, is back on the market after recently falling out of escrow.

“It does leave a big dent in this area, but we have seen an increase in activity for larger users since the beginning of the year to backfill these spaces,” he said. “There’s a greater interest from tenants, [typically] out of the area, to come to the area because of the availability that we have not seen in a long time.”

Molina Healthcare, which late last year purchased the ARCO Center towers on Ocean Boulevard, changed the complex’s name last week to Molina Center. In addition to the current space it occupies at the complex, the national healthcare provider and one of the city’s top five private sector employers, is expected to take up another approximate 125,000 square feet, according to Salvador Gutierrez, associate vice president of facilities for Molina.

The plan is to move Molina Healthcare’s employees from its nearby building along Golden Shore to consolidate into its headquarters at Molina Center, which is currently more than 12 percent vacant. The move is part of the company’s plans for a future nearly $1 billion downtown development project, Gutierrez said. “We’re very happy and excited about owning the building,” he said. “We’re looking forward to expanding.” Another development is the potential move by the Port of Long Beach, which plans to relocate its approximately 400-member staff to new facilities by the end of the year. The port is currently searching for about 173,000 square feet of office space. Although it had plans to buy and move into the World Trade Center downtown, the Long Beach Harbor Commission is currently assessing relocation options after the deal fell out of negotiations due to the commission’s tie vote on approving the sale last year.

Any resolution in regards to leasing or buying office space in Downtown Long Beach would have a positive ripple effect on the office market that would trickle down to Class B and C properties as well, Lee & Associates’ McCullough said.

Industrial: Developments, Activity Pressing Forward

With more consistency in the market, tenants and owner/users are moving on available properties in the South Bay industrial sector, which continues to maintain one of the tightest markets in the country, mainly due to its proximity to the ports of Long Beach and Los Angeles.

In recent months, industrial real estate activity has increased, with businesses in search of available high-quality, functional and well-positioned property. As a result, major industrial developments are starting to take hold in Long Beach and surrounding areas, according to real estate experts.

In fact, there is a total of 2 million square feet of industrial space in the pipeline, slated for construction this year in the South Bay area, according to Brandon Carrillo, industrial broker for Lee & Associates. Although several transactions are still pending, he said there seems to be more interest from businesses looking to own their own space, rather than just investors taking up properties.

“There are a lot of people moving on things instead of just kicking the tires,” Carrillo said. “It appears like we have the owner/user coming back to the market and there is all this pent up demand in the business.”

While transactions haven’t quite caught up to the level of activity currently in the market for the first quarter of the year, he said statistics should show declining vacancy and rental rates creeping up again this year.

The biggest industrial project in the South Bay currently is a 12.6-acre spec development that broke ground at Douglas Park adjacent to the Long Beach Airport (refer to separate story in this section). Developer Sares Regis closed on the property with Boeing this month. The project is expected to bring four new buildings to market with a total of 264,000 square feet by the fourth quarter. Three other industrial buildings there are also expected to break ground later this year. Carrillo said some of the buildings are already under contract.

Also at Douglas Park, an 110,000-square-foot industrial building has finished the majority of “build-to-suit” construction as the new corporate warehouse and headquarters for local online ink cartridge and printer supply retailer LD Products, which relocated and expanded from other facilities in Long Beach. If certified, the building would be the first-ever Platinum LEED industrial warehouse in the state. Lance Ryan, vice president of marketing and leasing for Watson Land Company, said the industrial developer and property manager is in the process of developing a 200,000-square-foot building at the Watson Industrial Center in Carson.

New buildings sell or lease up quickly since demand is strong and there is a lack of developable parcels in the area, Ryan said. “We’re seeing strong demand and that’s what’s really allowed us to move forward with spec development in this market,” he said. Lease rates have already increased since 2010 and 2011 for high-end Class A properties, while activity for Class B and C properties is now improving, he said.

Ryan noted that other large development projects are occurring in the City of Torrance, where Prologis is going to build a 272,254-square-foot facility, and Xebec is building a 264,900-square-foot facility to be completed by end of year. In late March, Prologis announced that a 270,764-square-foot industrial building at its South Bay Distribution Center in Carson was leased to 3PL Global, LLC. The center is now 100 percent leased.

Bill Townsend, commercial broker and vice president of INCO Commercial, said the vacancy rate for the Long Beach industrial market hovers around 5 percent and should continue to recover this year. He said major projects at the port, such as the replacement of the Gerald Desmond Bridge, are already adding new businesses to the area, bringing needed jobs and industrial activity. “We’re certainly a lot busier here and there’s more activity than before,” Townsend said. “The sense of fear is gone.”

Steve Warshauer, senior commercial advisor for First Team Commercial, said three buildings in West Long Beach that were formerly occupied by West Coast Choppers and a burger restaurant have closed escrow, or are expected to close, later this month. The Long Beach Rescue Mission, a lighting company and a diesel trucking operation are taking up the properties.

While there is still a fare amount of inventory to absorb, financing has improved for owners/users and owning may be more financially practical than leasing in the long term, Warshauer said. Despite various unknowns such as rising fuel costs, Long Beach is well positioned for growth by being centrally located between Orange and LA counties, he said. “Even if things get bad we’re better off than other areas,” he said.

http://lbbusinessjournal.com/long-beach-business-journal-newswatch/103-lof-scroller-articles-features-12-03-27/439-real-estate-markets-slowly-recovering-with-improving-economy.html