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Commercial Real Estate

Investment in industrial, office and retail properties is expected to intensify next year as vacancies continue to drop and rental rates rise. Many analysts expect the office market to shift into the development phase of the growth cycle, while the industrial market will ratchet up the pace of its speculative development.

“It’s an exciting time to be alive in the real estate business,” said Lewis Horne, executive managing officer of CB Commercial Real Estate Services Group.

The level of investment interest in all sectors is high and will likely remain that way throughout 1998. Real estate investment trusts currently own more than $6.2 billion worth of L.A. properties, giving the metro region the fourth-highest concentration of REIT ownership in the nation.

In 1997, REIT investment activity was especially intense in suburban and Class A office markets. Now that many of those properties have been scooped up, experts predict that REITS will move to older buildings in the Westside and San Fernando Valley markets. Some lagging office markets like Hollywood, West Hollywood and LAX-Century Boulevard are expected to see renewed interest as well.

The future of downtown, one of the county’s softest and largest office markets, remains cloudy. A number of potential catalysts for its revival such as the the Staples Center sports arena and Walt Disney Concert Hall cleared important obstacles in 1997, but some experts predict downtown will suffer a net exodus of office tenants over the next couple of years.

“You don’t turn the Lusitania on a dime,” said Stuart Laff, director of corporate real estate for Deloitte & Touche LLP.

Overall, the L.A. County office vacancy rate is expected to inch down to 15 percent from its current 16 percent.

The industrial market has been in a recovery mode for four years, and last year it began breaking records. The county vacancy rate is currently below 6 percent, even as 4.3 million square feet of new product came onto the market in 1997. The weighted average asking rental rate for standard industrial space rose by 5.2 percent in 1997, ending the year just shy of the 40-cent threshold, according to Grubb & Ellis Co.

The South Bay, Mid-Counties and San Fernando Valley industrial markets led the county in 1997. Several real estate insiders are bullish on the City of Industry and Vernon for 1998, given that those markets have lots of older buildings that can be recycled into state-of-the-art product.

Overall, experts expect the L.A. industrial market to remain in a state of balance for the next two years. The vacancy rate should hover around 5 percent, and rents are expected to rise by about 5 percent next year and 3 percent to 4 percent in 1999.

In the retail sector, most investment activity last year focused on grocery/drug store-anchored shopping centers. Now that the high level of REIT activity has reduced opportunities in that segment, investors are likely to turn toward distressed regional malls.

On the development front, expect to see continued development of multiplex theater-anchored shopping centers and more “street retail” projects.

Joyzelle Davis

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