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Commercial real estate players expect slow recovery in 2012

Investors are lowering their expectations for financial returns on office towers and other commercial properties but are still chasing after choice properties in the busiest cities, according to a report by accounting firm PwC and think tank Urban Land Institute.

October 26, 2011|By Roger Vincent, Los Angeles Times
  • San Francisco is among a handful of U.S. cities along global trading paths that are expected to prosper most in commercial real estate next year because they are attractive to workers with high-tech skills. Above, the San Francisco skyline as seen from Golden Gate National Recreation Area.
San Francisco is among a handful of U.S. cities along global trading paths… (Gina Ferazzi, Los Angeles…)

Commercial real estate players say they expect a grindingly slow recovery of their business next year as economic conditions marginally improve.

Investors are lowering their expectations for financial returns on office towers and other commercial properties but are still chasing after choice properties in the busiest cities, according to a report by accounting firm PwC and think tank Urban Land Institute. Los Angeles is among the top markets in the country for apartment and industrial property purchases.

Developers, brokers, architects and other property professionals surveyed for the report said that enduring economic doldrums and the absence of new jobs are weighing on real estate markets. Conditions for owners have stabilized, but improvements in occupancy and rents remain elusive except in a handful of cities popular with elite businesses.

San Francisco, Boston, Seattle, New York and other cities along global trading paths are expected to prosper most because they are attractive to workers with high-tech skills.

"More companies concentrate in urban districts where sought-after generation-Y talent wants to locate in 24-hour environments," the report said. San Francisco office buildings are commanding peak prices because investors are willing to gamble that they can substantially raise rents in the near future as businesses there grow.

Los Angeles County office occupancy has been depressed for many months, except in a handful of hot zones such as Santa Monica and Burbank favored by tech and entertainment companies. Other businesses show no signs of stepping up hiring enough to improve occupancies significantly during 2012. Orange County office owners continue to suffer from the collapse of the mortgage industry, which had a heavy presence there.

Southern California's industrial property market is recovering "nicely," the report said, aided by strong import and export activity at its seaports. Relatively high housing costs — even after major declines — keep apartments full and rents up, making the region's multifamily properties highly desirable to investors.

"Living smaller, closer to work and preferably near mass transit holds increasing appeal as more people look to manage expenses wisely," the report said.

Properties in the central business districts of Washington, New York and San Francisco were rated as the most popular with investors, though perennial favorite Washington slipped a bit in favor this year on fears of government cutbacks that could reduce occupancy.

Foreign investors still consider U.S. real estate a good place to park capital because of Europe's financial distress and the failure of Asian markets to live up to expectations.

The Urban Land Institute is holding its annual fall meeting in Los Angeles this year and expects hundreds of professionals to attend events at the downtown convention center.

roger.vincent@latimes.com

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