Several recent articles, particularly one in the Wall Street Journal, have attempted to analogize the current real estate market conditions in Los Angeles with the events that overtook Houston in the 1980s. These journalistic efforts not only are factually suspect but they also indicate a total misunderstanding of the nature of the Los Angeles real estate market.
We can all agree the real estate market across the country is generally depressed--and Los Angeles is no exception. However, the fundamentals of real estate dictate that individual markets must be judged on their own merits. I feel particularly well-positioned to comment, since our company has maintained offices in both Houston and Los Angeles since the late 1970s.
Houston suffered a severe depression, not only in the real estate industry but across the board, as a result of major declines in energy-related industries. Los Angeles, because of its vast economic diversity, will not suffer the same consequences. For example, defense is a high-profile California industry, and many have implied that cuts in this sector will have the same effect on Los Angeles as cuts in the energy sector had on Houston. At one time more than 80% of Houston's economic base was dependent on the energy industry. Defense accounts for only 8% of California's output of goods and services and only one-fifth of its work force.
Unlike Houston, Los Angeles, with several major urban centers, is driven by many different industries, populations and even governments, and most of these markets remain healthy. The Universal City/Burbank Media District market, for example, has an office vacancy rate of under 2%. Clearly, this represents one of the healthiest office markets in the nation.
While the downtown Los Angeles vacancy rate is 19%, it will be controlled by a number of critical factors that were not evident in the Houston marketplace. Additional construction is being tightly constrained by current capital market conditions, by a costly and lengthy approval process (Houston has no zoning ordinance) and by a recognition that supply has outpaced demand.
It is true that 10.5 million square feet of new construction has been approved in downtown Los Angeles, but, for reasons mentioned above, I expect that only one building, the Los Angeles Center, will be under construction in the next six to 12 months.
Downtown Los Angeles is also the beneficiary of a comparatively stable tenant base. This was not the case in Houston. In fact, there have been continuing and, in many instances, expanded long-term commitments by major space users in downtown Los Angeles, including Unocal, Southern California Gas Co., AT & T, Pacific Enterprises, Ernst & Young and Coopers & Lybrand.
Furthermore, many landlords have fared incredibly well during these difficult times, specifically, Mitsui Fudosan's 52-story building at Figueroa and Wilshire, which is more than 90% leased, Maguire Thomas Partners' new landmark 73-story First Interstate World Center and its 50-story, Gas Company Tower, which are 90% and 80% committed, respectively.
Most important, downtown Los Angeles office buildings are anchored by the strongest global and domestic ownership of any major downtown in the United States. Houston's "runaway" real estate development was undertaken by poorly capitalized domestic real estate developers and syndicates with limited real estate experience, who built poorly located and conceived products. The majority of these developments were also tax driven and not motivated by sound real estate fundamentals.
Other observers of the current downtown Los Angeles office market have made outrageous statements about it taking 41 years to absorb the current supply of office space. Our company has been tracking the market since the early 1980s and we estimate reaching full occupancy in downtown within five to eight years, based on current inventory and absorption patterns.
In no way am I trying to diminish the challenges that face those of us in the commercial real estate business. But continued pessimistic prognostications from so-called experts serve only to further depress the psychology of the real estate market and are, in some instances, self-fulfilling. In California today, I believe the glass is already more than half full.