Inland Empire Retail

Umansky

Brad Umansky and Bryan Ley, senior vice president and senior advisor with the Ontario, Calif., office of Sperry Van Ness. Posted 07/02/07.

What area is your expertise?
• We specialize in retail investment sales in San Bernardino and Riverside Counties. This region is more commonly referred to as the Inland Empire of Southern California.

What trends do you see presently in retail development in your area?
• Presently in the retail development sector we are noticing three common trends. Shop space leases are being signed at over $3 per square foot for new construction. Investment Sales of new retail developments are topping over $500 per square foot due to the high in-place rents and the demand for tenants to be in this valuable market. Additionally, costly land prices on the vacant land acquisitions and rising construction costs are causing developers to shrink their profit margins or be turned off from certain opportunities.

Ley

What type of retail product is doing well in your area?
• For the most part, all retail product is doing well in our market because we have been nationally ranked as the third fastest growing region in the U.S. Retailers and companies are fast at work trying to catch up with the demand of the growing communities by rushing to add more retail locations to serve customers and expanding companies to add additional offices to be closer to the employees.

What retailers are new to your area?
• There are four major retailers that are new to our area: Bass Pro Shops (set to open end of June 2007 in Rancho Cucamonga); Fresh and Easy (an entity owned by Tesco that is soon to be located throughout the Inland Empire); Flemings Prime Steakhouse (located in Rancho Cucamonga and opened first quarter 2007); and Mathis Brother’s Furniture (opening third quarter 2007 in Ontario).

Who are the active retail developers in your area?
• The most active retail developers in our area are: Lewis Retail Centers, Panattoni Development Company and NewMark Merrill Companies.

Please name one or two significant retail developments in your area. What impact will these projects have on the market?
• There are two major retail developments that will have a significant impact in our market. The first development is Piemonte at Ontario Center in Ontario, Calif. It’s being developed by Panattoni Development Company. Currently under construction, this development will create a complete urban village in the middle of the city with restaurants, shopping, upscale residential, business, entertainment and a state-of-the art sports and entertainment center that is owned by the City of Ontario. Confirmed tenants have not been released as of yet. The second major development, Garrett Ranch in Hemet, Calif., will feature a one million-square-foot lifestyle center, traditional retail, free standing big-box retailers, restaurants, office and residential components, encompassing over 200 acres of land in the western portion of Hemet, Calif. Garrett Ranch will be developed in several phases with groundbreaking planned for fourth quarter 2007.

Where is the majority of development taking place? Why is this area doing well?
• The majority of the development that’s taking place or is in the development process is located in the High Desert (Victorville, Hesperia and Apple Valley) as well as in southeastern Riverside County in the cities of Hemet, San Jacinto, Moreno Valley and Menifee/Murrieta. These areas are doing extremely well because of the huge surge in population growth in the past 5 years as a result of affordable housing and the need for the retail development to keep up with the residential growth. These markets have been dramatically underserved for years causing residents to travel outside the city limits to spend money on retail products. Today, and for the coming future, these residents are finally getting the retail to support their communities.

What area do you expect to be the next big retail development market? Why?
• We believe that San Jacinto and the High Desert (Victorville, Hesperia and Apple Valley) will continue to be big retail development markets, even more so than what we see today. With the availability of land and cities eager to increase development and sales tax revenue, these markets are in need of more retail development to support the thousands of new homes added yearly. These markets are also considered some of the last affordable places for new and existing homes where single family home prices are still available under $300,000.

Please describe the retail leasing activity in your area.
• Retail leasing in our area is very strong. We specialize in investment sales, but from colleagues that are in the retail leasing business, they tell us that they are busier than ever before, helping developers fill space as well as replacing tenants in existing centers.

What major leases have been closed recently?
• We specialize in investment sales and the question does not apply to us specifically. However, for newly constructed retail spaces over 20,000 square feet, you can expect to see a lease rate between $12 and $21 per square foot, triple net. Newly constructed in-line shop rents are averaging about $30 to 48 per square foot, triple net.

Please give a measure of retail vacancy rates and a measure of available sublease space.
• We are seeing that the average retail vacancy for the two counties of San Bernardino and Riverside counties in California is seeing approximately a 6 percent vacancy rate.

What types of retailers should look into your market in the coming year? What type of retail is needed?
• The following high-end retailers have come into our market in the last two years and have done extremely well: Coach, Flemings Prime Steakhouse, Banana Republic, Crate and Barrel, Jos A. Bank Clothiers and Wood Ranch Grill. We would expect that comparable tenants would be interested in coming into this market as well, to serve the growing executive community.

Would you like to make any additional observations about the retail market in your area?
• Our retail trade area is a dramatic and fascinating market that is constantly evolving and has transformed dramatically over the past five years. This market is now closely competitive to Los Angeles, Orange and San Diego counties in both rental rates and the variety of shopping opportunities.

Los Angeles Retail

Tranchina

Submitted by  Geoff Tranchina, vice president with the West Los Angeles office of Sperry Van Ness.  Published Online 05-22-08.

 
What area is your expertise?
Generally speaking, my expertise is in multi-tenant retail centers with a mixed-use component as well as traditional grocery anchored centers.  The areas that I cover are Los Angeles and Orange County, Calif.  
 
What trends do you see presently in retail development in your area?  
Since land costs have risen so dramatically, the general trend that we have seen is for more vertical development with a mixed-use component.
 
What type of retail product is doing well in your area?  
Urban infill projects are doing very well.  The tenants are not being aggressive like they were over the last few years so the focus has moved back to the urban infill locations.
 
What retailers are new to your area?
Clearly Tesco has made a big splash in our market, which has affected the plans of many of their competitors with regards to expansion.  While we hear their expansion has stalled, we still believe that it is too early to tell how their entrance in the market will affect the grocery business.
 
Who are the active retail developers in your area?
There are many, but it’s very fragmented.  Caruso, and CIM are some of the bigger players but there are others.
 
Please name one or two significant retail developments in your area. What impact will these projects have on the market?
Caruso’s project in Glendale is one that we are watching as it is really one of the bigger deals that have come on line over the last few years. Also, DJM’s Bella Terra project in Huntington Beach is one to watch as well.
 
Where is the majority of development taking place? Why is this area doing well?
The most interesting area for development right now would have to be Hollywood.  It’s really the renaissance of an area that has been depressed for many years.  With the amount of unique projects coming on line, we expect that the area will continue to trend positively for years to come.
 
What area do you expect to be the next big retail development market? Why?
Again, given the land constraints, I don’t see significant development in any one area, but rather, we are seeing projects across the county.  
 
Please describe the retail leasing activity in your area.  
Retail leasing has been slow over the last 2 quarters.  Tenants are still doing deals, but they are not nearly as aggressive as they were over the last few years.  This is the direct correlation to the overall economy, and we expect that contract and asking rents will go down for the first time in many years in 2009.

What major leases have been closed recently?
We are seeing a pullback in leasing and most new deals have been pushed back till 2010.
 
Please give a measure of retail vacancy rates and a measure of available sublease space.
It’s hard to gauge the exact amount of sublease space and vacancy in LA County in General, but we are noticing an up tick in the amount of sublease space hitting the market.  Most of the data we are seeing is really trailing the actual market by about 6 months.  We expect that vacancy rates will continue to creep up, but no major increases are expected.  The majority of problems in the leasing environment are deals that were signed at $3 to 4/SF NNN rent.  Those tenants are going to suffer as their sales decelerate.  
 
Would you like to make any additional observations about the retail market in your area?  
Retail has had a great run and will continue to do well, but many of the projects that were done over the last few years may suffer in the short term as the consumer pulls back on discretionary spending.  Moving forward, property owners are going to have to be more willing to negotiate and work with their tenant base in order to keep projects full.

Conejo Valley/Ventura County Retail

Schiff

Submitted by Michael Schiff, senior vice president with the Westlake Village, California, office of NAI Capital. Posted 2-13-06.

What area is your expertise?
• Conejo Valley/Ventura County, California

What trends do you see presently in retail development in your area?
• The Conejo Valley remains in very high demand. This has caused rents to continue to escalate, while vacancy remains almost non-existent. The strong demographics in this area ($100,000+ average household income and a population density of 1,185 people per square mile) and the fact that the city of Thousand Oaks has the second lowest crime rate of large cities in the nation are the major reasons why retailers want to be here. Because all of the national retail chains want to open a store in the Conejo Valley, the trend that we are seeing is that more and more mom-and-pop retailers are getting squeezed out of this market. When a retail space becomes available, the landlord will usually receive offers from both local mom-and-pop retailers and national chains. Since most landlords prefer to have national retailers in their center, the local stores are finding it difficult to persuade landlords to accept their offer over the national company's offer. In addition, the rents have also gotten so high that fewer and fewer mom-and-pop tenants can afford to lease space here.

What type of retail product is doing well in your area?
• all types

What retailers are new to your area?
• Almost every imaginable major retailer has a store here, so it is rare that we see a new one added that didn't already exist here. Calico Corners and Bright Child are the most recent. The Home Depot and Lowe's Home Improvement Warehouse have made several attempts to enter this market in Agoura Hills and Westlake Village but have been denied by the city each time. There is one Home Depot at the very west end of Thousand Oaks that was approved because it is located on the outskirts of the city.

Who are the active retail developers in your area?
• This is a hard question to answer because there is very little new development in this area. Finding land that is not already built on is next to impossible. Caruso Affiliated Holdings developed the two newest centers in this area.

Please name one or two significant retail developments in your area What impact will these projects have on the market?

The Lakes at Thousand Oaks in Thousand Oaks, California

• The most recent project, called The Lakes, was developed by Caruso Affiliated Holdings. Tenants include P.F. Chang's China Bistro, Claim Jumper, California Pizza Kitchen, Sushi Ko, Ben & Jerry's, Polacheck's Jewelers, White House/Black Market, Brighton Collectibles, Kalologie Skincare, Maison D'Optique, PerLei, Sophea Parros and The Coffee Bean & Tea Leaf. This beautiful project is located on Thousand Oaks Boulevard next to the Civic Arts Center. Set on 7.5 acres, it includes a richly landscaped park with two lakes, fountains and a public plaza. In the winter, one of the lakes transforms into an outdoor ice skating rink. The Lakes at Thousand Oaks, which opened on August 4, 2005, features approximately 30,000 square feet of restaurant space and 18,000 square feet of retail space. Although upscale developments like this one are not new to the Conejo Valley, many people believe that it will raise the rents on Thousand Oaks Boulevard because it is the most upscale project ever to have been built at a non-major intersection. Rents on Thousand Oaks Boulevard have historically been higher, the closer you get towards Westlake Boulevard to the east or Moorpark Road to the west. The Lakes is right in the middle and may bring rents up in the surrounding area of Thousand Oaks Boulevard.

What area do you expect to be the next big retail development market? Why?
• Newbury Park, Moorpark, Simi Valley, Camarillo and Ventura. These are the surrounding areas of the Conejo Valley and remain the only areas left to build. We are growing outward.

What major leases have been closed recently?
• The most recent leases are the tenants in the newly built center called The Lakes. They include P.F. Chang's China Bistro, Claim Jumper, California Pizza Kitchen, Sushi Ko, Ben & Jerry's, Polacheck's Jewelers, White House/Black Market, Brighton Collectibles, Kalologie Skincare, Maison D'Optique, PerLei, Sophea Parros and The Coffee Bean & Tea Leaf. All of these tenants opened in August 2005.

Please give a measure of retail vacancy rates. Please give a measure of available sublease space.
• Vacancy rates are under 2 percent. The average rents are about $42 per square feet and can be as high as $60 per square foot in some areas in the heart of Westlake Village and Thousand Oaks. Subleasing activity is also very low.

What types of retailers should look into your market in the coming year? What type of retail is needed?
• This is a Catch-22. We can never seem to have enough restaurants. Just as the hotels in Las Vegas maintain a 100 percent occupancy regardless of how many hotels are built, restaurants here are always packed. The wait for a table usually exceeds 90 minutes for dinner without a reservation. One would think that all the newly added restaurants in this area would have helped, but it remains as bad as ever. This is a Catch-22 because finding restaurant space here is next to impossible. The parking requirements the city has for restaurants is very strict, therefore you cannot just open a restaurant in any available retail space.

Would you like to make any additional observations about the retail market in your area?
• This is a great place to do business. Getting a location in this area takes patience, but it is worth the wait. I exclusively represented Buca Di Beppo, and it took us 4 years to get a site in Thousand Oaks, but they are certainly pleased with their sales volumes and are glad they were so persistent.

Inland Empire Multifamily

Runkle

Submitted by Paul Runkle, associate partner with the Temecula, California, office of Hendricks & Partners. Posted 08/16/07.

Click here for job growth chart

What area is your expertise?
• Inland Empire Multifamily Market. I am a 20-year veteran of the Southern California apartment market and I have focused primarily on the Inland Empire Region (Riverside & San Bernardino Counties) for the past 12 years. The Inland Empire is the most dynamic growth region in the state. From 1997 to 2020 the region will average job growth of 50,000 jobs each year and population growth of 100,000 people each year.

What trends do you see presently in multifamily development in your area?
• Since 2000, most cities within the Greater Inland Empire areahave seen rapid new apartment development, resulting in few available sites left for newprojects. In addition, most local city governments seem to have developed an anti-apartment sentiment. This means that developers, who need to rezone land to create apartment sites, undertake a risky process, which often takes upwards of 3years to receive final approval. On the positive side, the slow down in the for-sale housing market is causing land developers to rethink higher density zoning into their developments. This means that some well-planned apartment sites may be created in the future.

Who are the active multifamily developers in your area?
• The most active apartment developers in the Inland Empire are Fairfield Residential, Alliance Residential, Lewis Apartment Communities, Sares-Regis Group and Cameo Homes.

Where is the majority of development taking place? Why is this area doing well?
• The majority of apartment development is occurring in the submarkets of Rancho Cucamonga/Ontario, Moreno Valley and Temecula/Murrieta. These areas are seeing the majority of the new development, primarily due to the availability of sites zoned for multifamily projects. Strong job creation has contributed by facilitating rising demand for apartment properties in these areas as well.

What area do you expect to be the next big development market? Why?
• Due to healthy job growth, the availability of developable land and lack of an anti-multifamily mentality, the next big development market in the Inland Empire will likely be in the Perris/Menifee submarket.

What areas are doing well in terms of apartment leasing? Which areas are struggling with leasing?
• Overall the Inland Empire is doing fine with an overall vacancy rate of 5.4 percent in first quarter 2007. Areas perceived to be struggling are those submarkets with a number of newly built projects in lease-up, so concessions of one to two months free rent have crept into the market, but the underlying fundamentals are strong and the concessions will remain only in the short term.

For example, the Moreno Valley/Interstate 215 Corridor is viewed as being soft by institutional owners and investors, since 11 new apartment projects representing 3,082 units have been delivered between 2004 and 2007. Since 2004, concessions initiated to drive rental traffic for communities in lease-up, have been a part of this market. The truth is that very strong market fundamentals of over 50 million square feet of new commercial development, which will generate over 47,000 new jobs, is well under way and bringing the market quickly back to equilibrium. In addition, there are no new apartment projects in the planning pipeline for the city of Moreno Valley. Six of the 11 recently built projects are now stabilized, and the market only needs to lease about 650 new units to bring the market back to 95 percent plus occupancy. Supported by favorable economic trends, including strong job growth throughout the region, I predict the Inland Empire apartment market will stabilize during the course of 2007, and will remain a great market for occupancy and rental growth looking forward.

Please give a measure of apartment vacancy rates.
• The overall average apartment vacancy rate in the Inland Empire apartment market stood at 5.4 percent in first quarter 2007, up slightly from 5.0 percent registered 12 months prior. However, healthy demand and slowing pace of new construction will continue to foster steadily improving vacancy rates along with accelerating growth.

Please give a measure of condo sales activity in the area.
• Condo sales activity has tapered off tremendously since peaking in the summer of 2006, yet prices have remained relatively stable. In April of 2007, there were 339 condo units sold in Riverside County, with a median sales price of $319,000, representing a 7.5 percent decrease from 12 months prior. In San Bernardino County, 149 condo units were sold in April of 2007, with a median sales price of $323,000, equating to an increase of 5.9 percent from the year prior.

What impact do current interest rates have on the apartment and condo markets? What predictions do you have for interest rates and their effect on the multifamily market in the next year?
• Boding well for the local apartment market, I believe that interest rates will hold steady for the near term. Low variable rate loans and over supply in the for-sale market created programs that leveraged many buyers into homes that were unable to bear the true costs of home ownership. These former homeowners will be forced back to the rental market. Both for-sale residential construction and financing terms have pulled back, and combined with strong job growth, these factors should make any housing downturn in the Inland Empire mild compared to other major markets.

What is the status of job growth/(un)employment rates and what bearing will it have on the multifamily market?
• Both job growth and population growth are forecasted to remain strong in both the near- and long-term. With extremely strong market fundamentals, the need for housing and most importantly affordable housing, which apartments provide, will steadily increase.

Would you like to make any additional observations about the multifamily market in your area?
• Considering both natural and internal barriers to entry in the region’s for-sale market, along with strong inbound migration and job creation, there probably is not a better long-term market for apartment development than the Inland Empire. Most of the major national apartment developers have a presence in the region, and those that are not here are kicking themselves for not doing so.

San Fernando Valley Multifamily

Ferlauto

Submitted by Rory Ferlauto, vice president with the Woodland Hills, California, office of Sperry Van Ness. Posted 12-21-05.

What area is your expertise?
• Our team focuses on the sale of multifamily properties primarily in the San Fernando Valley (SFV), which is located in Northern Los Angeles County. It is home to about 1.8 million residents and has a fully integrated economic base that employs a work force of more than 750,000.

What trends do you see presently in multifamily development in your area?
• Condos, condos and more condos. Generally speaking, land prices are currently too high in the SFV to justify the construction of for-rent apartment projects. We are seeing condominium projects going up throughout the Valley, most of those projects are in-fill developments in the 15- to 40-unit range. You can drive up and down just about any street in the Valley and see a condo development under construction on a site that used to house a pre-1970s apartment building. Another prevalent trend is the marketing of apartment properties for sale as condo conversions, as this will generally yield the seller a higher price for the asset. There is strong interest from converters in the marketplace as the condo market is driven by robust demand from first-time homebuyers who cannot afford homeownership in the single-family market. We expect this trend to continue as the need for housing climbs and homeownership remains largely unattainable to most of the population.

Who are the active multifamily developers in your area?
• There are a multitude of multifamily developers that are active in this marketplace. Some of the larger developers that are currently active in the SFV include JH Snyder Company, Archstone-Smith Communities, D2 Development, the Morgan Group and AvalonBay Communities, to name a few.

Please name one or two significant multifamily developments in your area. What impact will these projects have on the market?
• An area of the SFV referred to as the NoHo Arts District (short for North Hollywood and a play on the 'SoHo' region of Manhattan) is experiencing exciting development activity. This area is part of the 750-acre North Hollywood Redevelopment District, located in the eastern end of the SFV. There are several projects completed, underway and planned in this district. Two of the major projects there include NoHo Towers and NoHo Commons.
NoHo Towers, currently under construction and slated to be complete in another 12 months, will have approximately 191 condominium units in 17,000 square feet of space. Upon completion, the Tower will be the tallest residential high-rise in the San Fernando Valley. It is being developed and built by JSM Construction Inc.
• NoHo Commons is JH Snyder Company's $200 million dollar mixed-use development, which is also centered around the North Hollywood Red Line subway station. Phase I is currently under construction and will encompass 438 residential apartments. Phase II, which is also under construction, will include 278 loft residential units, 20,000 square feet of live/work space, and 60,000 square feet of retail space including a gourmet food market. The centerpiece of the project is the North Hollywood Metro Line Station. These projects serve as models for transit-oriented development, featuring a combination of pedestrian-friendly design, live/work spaces and neighborhood retail.

Where is the majority of development taking place? Why is this area doing well?
• Much of the residential development currently underway is indeed located in the NoHo Arts District. These projects have taken many, many years to come to fruition as a result of difficult negotiations between the developers, the city planners, and the neighborhood councils. The final result is yet to be seen, but it sure appears to be a wonderful model for urban development. This is an area that had been zoned for high-density development and had a considerable amount of vacant and under-utilized land. It is in very close proximity to Universal Studios, the headquarters of Walt Disney Company, Warner Brothers and the West Coast operations of NBC. It is also centered around a mass transit operation, the North Hollywood Metro Line Station which connects the area to Hollywood and Downtown Los Angeles.

What area do you expect to be the next big development market? Why?
• I would expect to see future development to continue along transportation corridors, such as Ventura Boulevard. The city of Los Angeles has provided density incentives in these types of areas in the past. The SFV needs to provide more housing units for its growing population and we really do not have much available undeveloped land. By necessity, we will see pedestrian-friendly, higher density mixed-use developments and I believe we will see former commercial sites redeveloped into residential uses.

What areas are doing well in terms of apartment leasing? Which areas are struggling with leasing?
• The rental market continues to perform very strongly with annual rent growth in the 5 to 6 percent range. Average rents in apartment buildings of more than 50 units increased 5.4 percent in two-bedroom/two-bath units from third quarter 2004 to third quarter 2005, and in the same period one-bedroom units increased 6.2 percent. We do not see any areas of the SFV struggling with leasing, from the "A" areas to the "C" areas. The only concessions you might see would be in a very large new complex which is in its initial lease-up phase. We believe that apartment occupancy levels will continue to remain quite high and rent levels will continue to grow at a moderate level due to lack of significant new product on the market, demand from a growing population and the un-affordability of homeownership.

Please give a measure of apartment vacancy rates.
• Occupancy levels in the SFV continue to be exceptionally high and vacancies have remained under 3 percent since 2000.

Please give a measure of condo sales activity in the area.
• Condo sales in the SFV have been on fire over the past several years. There were more than 4,500 sales of condo units in 2004, and 2005 appears to be approaching that same number. Interestingly, the average price per square foot increased by 19 percent in the last year and by approximately 25 percent the year before. These are truly amazing numbers when you realize that historically condo price appreciation has not mirrored that of single-family home appreciation. This is a new trend that we believe has been driven by the skyrocketing prices of single-family homes, which are unattainable for most first-time homebuyers, and the low interest rate environment.

What impact do current interest rates have on the apartment and condo markets? What predictions do you have for interest rates and their effect on the multifamily market in 2006?
• This environment of historically low interest rates has pushed values of both apartments and condos to all-time highs in the SFV. Even though rents have been increasing for about 7 years now, by far most of the value appreciation experienced by apartment owners has been due to the low cap rates, which are in turn driven by the low interest rates. Likewise, the condo market has largely been fueled by the multitude of low-rate mortgages available in the marketplace today. In terms of the future, we think that interest rates have only one way to go and that is up! We have already been experiencing this over the last 30 to 45 days and we expect the trend to continue. Because of the historically direct correlation between cap rates and interest rates, we would expect to see cap rates shift upward gradually over the next 12 months and perhaps settle in at a more normal 6 percent range, versus the 4 to 4.5 percent range that we are currently experiencing. That being said, we expect to see apartment values slowly soften as interest rates increase. For example, if a property valued today at a 4.5 percent cap rate with a price of $4.5 million were to be valued at a 5.5 percent cap rate, the value would drop by more than $800,000 (or 17 percent) just due to cap rate compression.

What is the status of job growth/(un)employment rates and what bearing will it have on the multifamily market?
• Job growth in the SFV grew at a pace of 1.2 percent in 2003, while at the same time LA County lost 1.3 percent of its jobs. As far as population growth, the SFV grew at 5.9 percent between 2000 and 2004. An even more significant demographic in the SFV driving the demand for apartment units is the dramatic rise of the Hispanic population. The northeast SFV is projected to experience the biggest increase in Hispanic population growth and thus we expect to see the biggest demand for housing here. We also know that an increasing portion of the general population will never be able to afford homeownership and as this segment of the population continues to increase, the SFV should see a long period of sustained growth in demand for apartments and continue to place upward pressure on rents. We believe that this will also be the case for condos, which will continue to serve the first-time homebuyer population.

Would you like to make any additional observations about the multifamily market in your area?
• We believe that the long-term outlook for apartment investments is very strong. All of the major indicators point to a continuing positive outlook: 1) little to no developable land, 2) strong barriers to entry both geographically and politically, 3) housing affordability not available to most residents, and 4) continued population growth, especially in the Hispanic sector. We expect to see more properties on the market in 2006 as owners begin to feel that we have hit the "top of the market," and the more astute owners take advantage of this artificially low cap rate environment.

Los Angeles Multifamily

Wallace

Submitted by Kitty Wallace, senior vice president with the West Los Angeles office of Sperry Van Ness.

Posted 04/24/08

What area is your area of expertise?
My area of expertise is Southern California, but for the purpose of this interview I will focus on Los Angeles County.

What trends do you see presently in multifamily development in your area?
The rapid escalation of construction costs has subsided and in some cases is even coming down and labor is more widely available and less expensive. Despite reduced costs, land costs have started to come down. As demand for luxury condos wane, many development sites that were once slated for condo-construction will most likely be redirected to multifamily apartment buildings or mixed-use buildings.

Who are the active multifamily developers in your area?
A few major multifamily developers in the area are Legacy Partners, Related Development Company, NMS Properties, JPI Development, Lowe Enterprises, Fifield Company, and JSM Development.

Please name one or two significant multifamily developments in your area. What impact will these projects have on the market?
One significant multifamily development is the $600 million mixed-use development on Hollywood and Vine by Legacy Partners.  This project is comprised of a hotel, retail space, condominiums, and 375 luxury apartments.  It is scheduled for completion in 2009.  Another major development is the NoHo Art Wave by Lowe Enterprises in North Hollywood.  This $1.3 billion project will include apartment, retail and office space.  Overall the project will take place on 15.6 acres and include about 560 apartments. The project is slated to begin construction in 2009.  These large-scale developments will bolster the surrounding areas by bringing in new businesses, restaurants, and a higher income tenant base. 

Where is the majority of development taking place? Why is this area doing well?
The majority of developments have taken place in Hollywood, Koreatown, Downtown Los Angeles, and North Hollywood. Koreatown is a self-sustaining economy due to its large Korean population who both live and work within the area. Downtown has completely turned around in the past five years as a result of billions of dollars in new developments including the new Ralph’s Grocery Store, L.A. Live, and the addition of hundreds of luxury condominiums. Hollywood, North Hollywood, and Culver City like Downtown and Koreatown have been revitalized with the goal of providing new housing options in transit-based areas with many employers.

What area do you expect to be the next big development market? Why?
City officials are planning major improvements to East/West streets such as Pico Boulevard and Olympic Boulevard. We anticipate improvements to the overall look of the streets and to the flow of traffic with an additional push for the construction of multifamily buildings to these transportation corridors. There is a growing trend for people to live within easy reach of their offices and the city is responding with new initiatives to develop mixed-use projects in these corridors.

What areas are doing well in terms of apartment leasing? Which areas are struggling with leasing?
The apartment rental market remains fundamentally strong. In most markets it is now less expensive to rent than it is to pay a mortgage, taxes and insurance. Additionally, it is becoming more difficult to obtain financing increasing the demand for rental living. In C and D markets, as some have lost their homes and/or their jobs, they are temporarily moving back home or rooming together which has increased vacancy and decreased rents slightly in these markets. However, as these renters get re-employed in our diverse job market, occupancy and rent growth shall return to L.A.’s consistently higher than national averages.

Please give a measure of apartment vacancy rates and note the city/state these rates apply?

Hollywood 2.4 percent
Beverly Hills 5.9 percent
Santa Monica 1.7 percent
Downtown 8.9 percent
West Los Angeles 2.9 percent
Los Angeles on Average: 3.88 percent

What predictions do you have for interest rates and their effect on multifamily market in the next year?
Current interest rates have slowed the development market and basic deal flow throughout the United States.  I expect interest rates to remain low due to the drastic hits the economy has taken from the mortgage crisis.  By the end of 2008 and 2009 things should be begin to flush out and we might see an increase in interest rates by mid 2009.  Pricing and development should slowly start to ramp back up by the middle of 2009.

What is the status of job growth/(un)employment rates and what bearing will it have on the multifamily market?

Click here to see chart
Because Southern California has such a diverse economy it remains fundamentally strong. Currently the unemployment rate in Los Angles County is 5.3 percent, which is lower than the state at 5.7 percent and slightly higher than the nation at 4.8 percent. We expect the employment rate, rent growth, and occupancy numbers to improve as laid off workers are reabsorbed into other sectors of the market. The industries that took the biggest hit after the mortgage crisis were real estate, construction, and mortgage banking. Fortunately, these fields only compromise a small portion of total employment in Los Angeles and can be redistributed into various other sectors quite easily.

San Diego Multifamily

Taylor

Jim Taylor, senior vice president with the San Diego office of Sperry Van Ness. Posted 06/08/07.

What area is your expertise?
• Multifamily property throughout
San Diego County.

What trends do you see presently in multifamily development in your area?
• We are seeing a major market correction in the condominium market wherein transaction volume is lower and average sales prices are declining. As an example, sales of new homes and condos were down 30.7 percent in March in San Diego County compared with the same month last year. This is due to a combination of factors including buyer hesitation caused by apprehension, the well publicized downturn in the national housing market, tightening credit requirements, interest rate concerns, job concerns and over-supply. As a result of the slowing of the condominium market, many developers are selling entitled condo projects prior to commencement of construction or even in mid-construction to apartment developers. The recent sale by D.R. Horton of the 161-unit Fashion Walk project in Mission Valley to Avalon Bay is a prime example of this recent trend. We expect this trend of entitled condominium projects reverting to apartments to continue, especially in the downtown area.

Who are the active multifamily developers in your area?
• The major for-sale condominium developers in San Diego County include Lennar, D.R. Horton, Barrett, Bosa Development, Centex, William Lyon and Citymark Development. Active national apartment developers include Fairfield Residential, Avalon Bay Communities, Archstone, Hanover Property Company, Camden Property Trust and Simpson Housing.

Please name one or two significant multifamily developments in your area. What impact will these projects have on the market?
• Fairfield Residential is currently under construction on their Pravada at Grossmont Trolley and Alterra at Grossmont Trolley apartment projects in La Mesa. Both communities will include 527 one- and two-bedroom apartments, built on 8.5 acres adjacent to the Grossmont Trolley Station. Fairfield will replace the 600 existing surface parking spaces owned by the Metropolitan Transit System with structured parking, where the lower level will serve as replacement spaces and the second level will serve the residential units. Avalon Bay has purchased in mid-construction the 161-unit Fashion Walk located adjacent to the Fashion Valley Mall in Mission Valley. Apparently, the seller D.R. Horton lost confidence in the viability of the condominium market in San Diego and elected to sell the property after construction on the condominiums had started. Avalon Bay has taken over construction and plans to complete the project as permitted. Rather than condominiums, Avalon Bay plans to operate the community as luxury rentals.

Where is the majority of development taking place? Why is this area doing well?
• Of the new product released this year, 626 units or 43 percent of has been in San Marcos. This is due to the expansion of CSUSM and the need for affordable housing in North County. The downtown San Diego market also continues to hedge forward with 3,414 condos and 347 apartments under construction.

What area do you expect to be the next big development market? Why?
• The South Bay, which includes Otay and Chula Vista/National City, will be the next big development market for multifamily housing. In Chula Vista, the 500-acre Bay Front Master Plan is moving forward. The plan is a joint effort between the City of Chula Vista and the Port Authority of San Diego. More than 2,000 multifamily units may be included in the final master plan. In Chula Vista’s Urban Core Specific Plan, there are another 7,100 residential units projected. Additionally, downtown San Diego will continue to bring new multifamily units to the market. As of Jan. 1, 2007, downtown San Diego has approximately 7,116 condos and 1,278 apartments either planned or pending approval. It is anticipated many of the existing approved condominium project will revert to rentals.

What areas are doing well in terms of apartment leasing? Which areas are struggling with leasing?
• Historically strong submarkets continue to lead the county in vacancy rates including Ocean Beach/Pt. Loma at 1.4 percent, Mission/Pacific Beach at 2.5 percent and El Cajon/Santee at 3.2 percent. Those submarkets suffering are Vista at 5.7 percent, SD/East of Interstate 15 at 5.4 percent, and North Beaches at 5.3 percent, due to conversions from apartments to condos and competitive property location, of course.

Please give a measure of apartment vacancy rates.
• The vacancy rate was at 4.5 percent as of March 31st, compared with 1.8 percent in September and 3.1 percent a year ago. This represented the highest vacancy rate since 4.96 percent in March 1995. The average rent countywide stood at $1,261, up $20 from September and up $50 from a year ago.

Please give a measure of condo sales activity in the area.
• The median price for condos fell 2.7 percent, down 3.9 percent compared to last April. Condo sales rose 3.3 percent month-over-month, but were off 3.6 percent compared to last April.

What impact do current interest rates have on the apartment and condo markets? What predictions do you have for interest rates and their effect on the multifamily market in the next year?
• When interest rates go up, capitalization rates go up, higher down payments will be required and, concurrently, prices will decline. Lenders are reluctant to make new loans for condo conversion projects as the saturation of inventory makes many new projects less likely to get feasible financing. When equity markets sold off worldwide, interest rates fell sharply. I anticipate the Fed to ease later on this year as concerns grow over how the slowing housing market will impact the economy.

What is the status of job growth/(un)employment rates and what bearing will it have on the multifamily market?
• Between 2002-2003, San Diego employment growth trended well above the U.S. and western regional averages at 1 percent vs. -.5 and -.25 percent. The national unemployment rate reached a low of 4.4 percent in March, while San Diego remains strong at 4.1 percent for April, which is well below the California rate of 5 percent. San Diego’s diversified economy continues to provide hospitality jobs, which accounted for more than 70 percent of new jobs added in the county last month. Health and educational services added 400 jobs, mostly at private colleges and universities; financial activities added 300; and manufacturing added 100. Local construction firms added 400 jobs in April after hiring 800 new workers in March. The impact of the housing slump and declining government spending will translate to slower economic growth, while the job market will provide strong demand for multifamily housing.

Would you like to make any additional observations about the multifamily market in your area?
• The well-financed, long-term holders are and will be active. The entitlement process in San Diego can exceed 4 years. San Diego has very little developable land since we are bordered by the ocean, the mountains and Camp Pendleton. Long term, it is all gold in San Diego.

Los Angeles Office

Zwicker

Submitted by Ted Zwicker, vice president with the Los Angeles office of Sperry Van Ness.  Posted Online 05-08-08.
 
 
What area is your expertise?
The west Los Angeles office market.

What trends do you see presently in office development in your area?  
There is a dramatic tightening of the market, with rents in some specific market areas jumping by 50 percent in the last 12 months.  

Who are the active office developers in your area?
Legacy Partners,  Blackstone, Lincoln Property, and Tishman Speyer.

Where is the majority of development taking place?
In and around Playa vista (the Howard Hughes project)  

Why is this area doing well?
This is not only where the greatest amount of vacant developable land is, but it is also  near to LAX, as well as being central to the residential communities of both West Los Angeles, Marina del Rey, Beverly Hills, the Palos Verdes Peninsula and the beach communities.

What area do you expect to be the next big development market?  
This market will be strong for the next 10 years because there is a sufficient supply of vacant land.  
 
What areas are doing well in terms of office leasing?
The whole West Side.

Which areas are struggling with office leasing?  
Downtown Los Angeles

Please give a measure of office vacancy rates.
The vacancy rate in the area is about 8.6 percent.  
 
What impact do current interest rates have on the office market?
The low interest rates should help allow new projects to be built, however there seems to be a lack of construction funds for new speculative projects, and only the strongest developers are able to obtain financing in this market.  

What predictions do you have for interest rates and their effect on the office market in the next year?
Interest rates should be stable, and again this will help the office market.

What is the status of job growth/(un)employment rates and what bearing will it have on the office market?
There is expected to be a shrinkage of jobs in this area due to the dramatic reductions in mortgage, real estate, and other financial sectors from the housing slowdown.   

Is there any type of office tenant absorbing a majority of space?
Entertainment, Software and Gaming.

What areas will be affected?  
These industries are specifically concentrated in Santa Monica, Culver City and the West Los Angeles area.

Would you like to make any additional observations about the office market in your area?  
I have been in the office leasing market in Los Angeles since 1965, and with the exception of 1975 to 1980, this is the strongest office leasing market in almost 50 years in Los Angeles.

Inland Empire Office

Submitted by Dan Wakumoto and Lindsay Tragler, senior investment advisor and investment advisor with the Ontario, California, office of Sperry Van Ness. Posted 08/03/07.

Wakumoto

What area is your expertise?
• We are focused on the eastern Los Angeles County and San Bernardino County markets.

What trends do you see presently in office development in your area?
• The region has experienced a period of high population growth due to its affordable housing relative to neighboring Los Angeles and Orange counties. This has created a need for new office product to serve the growing population. Developers have responded to sub 10 percent vacancy rates with projects ranging from business parks with for sale condos to 10-story office towers in master planned campuses. If delivered as scheduled, these projects could increase the total market inventory by as much as 12 percent and over 20 percent in the active Ontario Airport submarket. The high profile developments, particularly the well-appointed mixed-use projects, are newer to the Inland Empire. Particularly in Ontario and Rancho Cucamonga, we are seeing many more mixed-use office developments that incorporate on-site retail, restaurants, and other amenities, and in some cases hospitality and multifamily components.

Tragler

Who are the active office developers in your area?
• The most active developers in the Inland Empire market include The Bates Company, The Hileman Company, IDS Real Estate Group, Panattoni Development Co. and The Rockefeller Group.

Please name one or two significant office developments in your area. What impact will these projects have on the market?

• The Hileman Company’s HavenPark development on Haven Avenue and 4th Street in Rancho Cucamonga is a mixed-use project with a small retail component, a restaurant, a hotel and two office buildings totaling 150,000 square feet. The office buildings were constructed in the project’s first phase. Prior to completion, the project was 100 percent leased with Co-Op Financial Services occupying one 75,000-square-foot building. This bodes well for the strength of the market, and the project’s success encouraged Hileman to joint venture with Pacific Coast Capital Partners to acquire additional office buildings and development land on Guasti Road in Ontario.

• Piemonte at the Ontario Center is a $900 million mixed-use campus that incorporates office, retail, multifamily, and hospitality components developed by Panattoni Development Co. It will also include an 11,000-seat arena that will host concerts, conventions and minor league sports competitions. The pedestrian oriented 120-acre project is one mile from the Ontario Airport and borders the city of Rancho Cucamonga. A total of approximately 520,000 square feet of Class A office space will be included, and a 120,000-square-foot five-story office building under construction is currently under construction.

Where is the majority of development taking place? Why is this area doing well?
• The majority of the development is taking place in near the Ontario International Airport (ONT) with other significant developments in the San Bernardino and Palm Springs submarkets. Ontario and Rancho Cucamonga are desirable for developers due to airport expansion plans and increasingly strong demographics. Many residents of the Inland Empire no longer want to commute to Los Angeles and Orange County, and they are seeking jobs closer to home. This employment base is drawing companies into the Inland Empire. Companies are also expanding existing operations in the region because they are finding it more difficult to service this large population from offices outside the region.

What area do you expect to be the next big development market? Why?
• As housing has become less affordable in the cities of Rancho Cucamonga and Ontario, residents have pushed further west along the 10 Freeway toward San Bernardino and further north along the 15 Freeway into the Victor Valley. These are likely to be the next big development markets.

What areas are doing well in terms of office leasing? Which areas are struggling with office leasing?
• Leasing in the Ontario Airport submarket is strong, but a great deal of the new product has yet to deliver. Because vacancies are limited, well-located space continues to lease throughout the Inland Empire.

Please give a measure of office vacancy rates and a measure of available sublease space.
• The current vacancy rate of the Inland Empire market is 9 percent. This is a slight increase primarily due to new Class A product deliveries that have yet to be absorbed. In the Ontario Airport submarket, the Class A vacancy rate is of 16 percent while the Class B and C vacancy rate is 6 to 7 percent.

What impact do current interest rates have on the office market? What predictions do you have for interest rates and their effect on the office market in the next year?
• Fluctuating interest rates will cause investors to be more conservative as they calculate potential returns. If the interest rates stay at the current level or continue to increase, we are going to see upward pressure on capitalization rates. More buyers will be priced out of deals, and paying taxes may be more attractive than a 1031 exchange.

What is the status of job growth/(un)employment rates and what bearing will it have on the office market?
• The current unemployment rate in San Bernardino County is 5 percent. Unemployment is expected to inch up in the coming years but will remain relatively low. Strong demographics will contribute to the stability of the office market.

Is there any type of office tenant absorbing a majority of space? What industries do you expect to expand in the next year to absorb a great deal of office space? What areas will be affected?
• The office tenant mix in the Inland Empire is increasingly diversified. It continues to be a popular market for back office operations and call centers for companies in the financial services, insurance, and mortgage industries. Rancho Cucamonga is the site of Mercury Insurance headquarters and Co-Op Financial Services. Just Mortgage Inc. will move their corporate headquarters to the city’s HavenPark Development. In addition to real estate and mortgage companies, banks, investment groups, lawyers, accountants, public relations firms, and architects are absorbing space in the Inland Empire. The region is significantly underserved by medical professionals. Construction of new medical office space and conversion of existing space into specialized medical office space will increase the percentage of space occupied by doctors and medical professionals.

San Diego Office

Submitted by Matt Midura, associate with NAI San Diego. Posted Online 04/28/08.

Midura

What area is your expertise?
Office / San Diego/ Submarket: Kearny Mesa

What trends do you see presently in office development in your area? 
Once known primarily as an industrial market Kearny Mesa continues to add new office buildings to its inventory.  The market currently consists of approximately 9.4 million square feet of office space of which only 13.8 percent is Class A space.  Recent development projects support an increased movement toward new Class A office buildings.  Two brand new Class A developments underway in Kearney Mesa include the Sunroads Centrum (273,468 square feet) and the Terraces at Copley Point (380,000 square feet).  These two projects together will add an additional 653,468 square feet for a total of 1.3 million square feet of Class A office space in the Kearny Mesa market.

Who are the active office developers in your area?
Sudberry Properties, Sunroads Enterprises, the County of San Diego, Badiee Development Inc., and The Ghianni-LaRussa Group.

Please name one or two significant office developments in your area. What impact will these projects have on the market?
Sunroad Centrum: The Sunroad Centrum is a 273,468-square-foot, Class A office tower in Kearny Mesa designed by Brian Paul & Associates, which is underway and ready to deliver approximately May 2008.  The building is developed and owned by Sunroads.  This development offers the region’s first Class A, LEED certified building which is part of a master planned community that will ultimately include 1 million square feet of Class A office space, over 1,000 residential units, and a two acre park. Unobstructed 360 degree views, unparalleled access, an exercise gym with shower facilities, high-speed elevators, and an ample 4/1000 parking ratio are among the tower’s many features.

Where is the majority of development taking place? Why is this area doing well?
Currently, the majority of development is taking place in Kearny Mesa and Downtown.  The opportunity to find land and develop in San Diego is scarce and for that reason the Kearny Mesa market allows for some potential development but mainly redevelopment opportunities.  In addition, downtown San Diego is an outstanding market with numerous amenities and a strong base for tourism which helps provide a prime market for continued redevelopment opportunities.

What area do you expect to be the next big development market? Why?
The downtown market will continue to be a strong redevelopment area due to its numerous amenities and strong base of tourism.  I would expect to see redevelopment projects throughout the entire downtown area with a focus on East Village due to opportunity incentives.  In addition, due to the scarcity of undeveloped land any new projects throughout San Diego County will have to take place in small pockets as land becomes available.

What areas are doing well in terms of office leasing? Which areas are struggling with office leasing?
Kearny Mesa market has continue to be a strong office market as vacancy decreased from the beginning of the year to the end of the first quarter in 2008 from 10.2 percent to 9 percent.  Carlsbad is seeing an opposite affect as vacancy has increased from 18.9 percent at the beginning of 2007 to 24 percent at the end of first quarter 2008.

Please give a measure of office vacancy rates. Please give a measure of available sublease space.
The office vacancy in the Kearny Mesa is 9 percent with 17 percent availability.  Sublease space available is at 1 percent. 

What impact do current interest rates have on the office market? What predictions do you have for interest rates and their effect on the office market in the next year? 
The SBA 504 Loan continues to offers small businesses low, long-term, fixed-rate financing.  These rates continue to be available to the small business owner at very low rate.  I would predict that prospering small businesses would look to take advantage of low rates in addition to the availability of owner-user office product on the market.  Small business owners looking to lock in at low rates could potentially look for product available with tenants in tow to help subsidies costs until business picks up to full throttle.

What is the status of job growth/(un)employment rates and what bearing will it have on the office market? 
Unemployment rose from 4.3 percent in February 2007 to 5 percent in February 2008. This means the demand for office space will decline and vacancy will increase.

Is there any type of office tenant absorbing a majority of space? What industries do you expect to expand in the next year to absorb a great deal of office space? What areas will be affected? 
The defense and military contracting industries remain strong in addition to communications and software providers.  I would anticipate these types of tenants look to take advantage of different opportunities that become available in this market.