For years, commercial real estate in Los Angeles County had been booming. Then troubles hit the nation’s financial sector and developers weren’t able to secure financing, causing their projects to come to an abrupt halt.
The fallout continued as businesses, unable to get affordable loans to expand, laid people off and shut their doors. Commercial and industrial vacancy rates rose rapidly.
The summer and fall of 2008?
No. This was the bleak picture in Los Angeles County in late 1980.
With inflation threatening to get out of control, the Federal Reserve had hiked interest rates, pushing the prime rate to a record 21.5 percent and plunging the country into recession. Projects proposed during the boom a year earlier all of a sudden didn’t pencil out and were put on hold. Business failures and layoffs soared, leaving commercial and industrial landlords in the lurch.
“You couldn’t get financing to do anything at the time,” said John Husing, a veteran economist now with his own consulting business in Ontario.
The halt was temporary; within a couple of years, the county and the region entered the greatest commercial real estate boom in decades. It was just one of the dramatic swings in the boom-bust cycle that has defined the local commercial and industrial real estate scene for the last half-century all of which offer some clues, though no easy answers, as to how the current bust will play out.
“By my count, I’ve seen eight or nine of these cycles since I first started in the industry in 1961,” said Stan Ross, chair of the Lusk Center for Real Estate at USC, who has worked as a real estate accountant and consultant. “Each downturn I’ve seen has a different cause, which often determines how quickly we get out of it.”
Boom and bust
Most of the slowdowns have been brief, including a couple in the 1960s and in 2001-02 after the dot-com collapse. A sharper downturn hit in the mid-1970s as inflation and aerospace cutbacks rocked the area.
But almost every time a slowdown hit, the region’s population growth and a resultant explosion of new businesses helped speed the recovery of the commercial and industrial real estate markets.
The major exception was the recession of the early 1990s, the worst the region had seen since the Great Depression. It was the result of a double whammy: an overbuilt commercial real estate market and huge aerospace cutbacks.
The overbuilding stemmed from a five-year boom in the mid- to late 1980s, fueled by easy financing from savings and loans and an influx of foreign investment mainly from Japan. Commercial high-rise buildings in downtown Los Angeles and on the Westside became trophy properties for Japanese investors, causing rents to skyrocket.
But then the savings and loan scandal hit, prompting a clampdown on lending and halting any new projects. The popping of the real estate bubble in Japan forced many Japanese investors to pull the plug on their properties in Los Angeles, dumping them on the market at fire-sale prices.
At the same time, with the Cold War ending, the so-called “peace dividend” resulted in a major contraction of the local aerospace industry, with hundreds of thousands of aerospace workers laid off, plants shuttered and subcontractors going out of business.
“Major downturns in the market occur when the fundamentals are out of balance which happened with the overbuilding of the 1980s and in a major recession,” said Steve Cauley, director of research for the Ziman Center for Real Estate at the UCLA Anderson School of Management. “We had both of these hit at once in the 1990s, which is why that downturn was so pronounced.”
The mood was so dour that industry players in early 1991 coined the phrase: “Stay alive till ’95.” Indeed, it took until late 1995 and into 1996 for the market to turn. And the former aerospace haven of the South Bay didn’t recover until recent years, when abandoned aerospace properties eventually became warehouse and distribution centers for a booming trade sector.
“In the South Bay, 40 percent of all the office space was leased by aerospace. We were very vulnerable,” said Terry Reitz, senior vice president of the L.A.-South Bay office for Grubb & Ellis Co. “When the aerospace cutbacks happened, there was a huge dump of space.”
To most industry participants and observers, the current commercial real estate slowdown is not likely to turn into a long, wrenching collapse like the early 1990s.
This time, there’s little overbuilding in Los Angeles County. The county is already largely built out and only a few major commercial buildings have come on line in the last 17 years. What’s more, in many parts of town, old industrial buildings were converted into lofts or other residential units, exacerbating a growing shortage of industrial space.
“The fundamentals of the local market are much stronger now than they were in 1990,” Cauley said. “The only thing now is the risk of a major recession with massive job losses.”
