Stable, Tenuous, Hopeful, Uncertain – Real Estate Rebound Mirrors National Economy
By Joshua H. Silavent - Staff Writer
February 12, 2013 - The Federal Reserve’s announcement in December that it would keep interest rates near zero – absent steep inflation – until the U.S. unemployment rate falls to 6.5 percent was good news for a beleaguered, but improving, real estate market whose long-term fiscal health is inextricably dependent on renewed job growth. But if and when the country’s workforce reaches this new baseline of “full employment” remains to be seen.
The latest jobs numbers do little to clarify the picture. The nation’s unemployment rate increased slightly in January to 7.9 percent from 7.8 percent, but this was mostly a good thing as more people began looking for work after having dropped out of the labor force altogether. The private sector added about 157,000 new jobs last month, and revised data from 2012 show an additional 335,000 jobs were created last year. All told, the economy added an average of 181,000 jobs per month last year. And wages are growing slightly faster than inflation.
Construction of The Promenade pedestrian corridor in Downtown Long Beach,
seen here at night along the north block between Broadway and 3rd Street,
is finally complete. City officials gathered at The Promenade February 6
for a ribbon-cutting ceremony unveiling the third and final phase of
construction. “I think most of you may know what this space looked like
a couple years ago,” Mayor Bob Foster said. “We’ve converted it into a
great urban pedestrian area. We’ve got commerce, residents and open space.
It’s now safe, it’s clean, it’s comfortable.”
(Photograph by the Business Journal’s Thomas McConville)
Still, more than 12 million Americans remain out of work, with the average individual having been jobless for 35 weeks. And the pace of current growth is not likely to result in significantly lower unemployment in the near-term, as jobs are being added at a clip that barely keeps up with the influx of an estimated 88,000 new workers into the labor market each month.
“The main storyline is that despite the uptick in the unemployment rate, the national labor market continues to move in the same direction and same pace it was moving during last year,” said Robert Kleinhenz, chief economist with the Los Angeles County Economic Development Corporation.
Though California job gains last year surpassed the national average, the Golden State also has a longer climb back to from the throes of the recession. The state’s unemployment rate stands at 9.8 percent, down 2.6 percent since the fourth quarter of 2010. The Los Angeles-Long Beach-Santa Ana metropolitan jobless rate in December 2012 was 9.3 percent.
Critical employment sectors in Long Beach, such as healthcare, transportation and trade, have continued to show steady jobs gains over the last year. And though still lagging across Los Angeles County, new home construction is regaining some momentum regionally this year. But the city posted a 10.8 percent jobless rate in November of last year, perhaps an early sign of recent spending cuts to federal defense programs that caused national gross domestic product (GDP) to shrink in the fourth quarter.
Meanwhile, the state is forecasted to run a surplus this year, and Gov. Jerry Brown has proposed a balanced budget for fiscal year 2014. But the cost of eliminating the deficit has been high, both in terms of spending cuts and tax increases.
Though the fiscal cliff appears less dire than it did before the new year, consumer confidence is likely to take a hit from recent tax increases and the impending federal sequestration in March. The expiration of the 2 percent payroll tax cut and looming spending cuts to defense and domestic programs will likely inhibit economic growth in 2013. The U.S. Commerce Department reports that the national economy shrank 0.1 percent in the fourth quarter of 2012 as government spending contracted sharply.
Indeed, cuts to federal defense spending reduced GDP growth by 1.28 percent, according to the U.S. Bureau of Economic Analysis. Meanwhile, businesses depleted their inventories to the tune of $40 billion, reducing GDP growth by 1.25 percent. Sequestration, which mandates across-the-board cuts, is equivalent to a 0.5 percent loss of GDP. “We know there’s going to be something of a drag,” Kleinhenz said. “Until the consumer sector experiences a genuine uptick in activity . . . I don’t think we’re going to see much more than a 2 percent growth rate in the economy.”
So how does all this translate in the real estate industry?
Thanks to low inventory, low interest rates and an upward trajectory of median sales prices, what was for years a homebuyer’s market flipped to the seller’s advantage in the fourth quarter of 2012, and that dynamic is holding true so far in 2013. Indeed, the single-family sector is the strongest it has been since the recession hit. But risks are present and the recovery, though stable at this time, remains tenuous as cash investors storm the market and fears of a shadow inventory of distressed properties flooding the market threaten to unseat the recent balance that has been struck.
If the single-family market is hot right now, the multi-family market is scorching. Cash investors are flocking to purchase apartment and condo units as rentals remain an attractive living option to the home-buying averse. Throughout the South Bay, a number of multi-family projects are now under construction or set to open in the first quarter. But the recent positive trends likely spell higher rental rates in 2013, as the available inventory of single-family homes remains tight.
Increases in California imports and exports are driving the industrial market right now, with firms connected to the local trade industry in need of warehouse and manufacturing space. But outside of the Sares-Regis Group’s acquisition and development of Douglas Park, very little new industrial construction is expected in the greater Long Beach market this year.
Recently revised jobs reports show better-than-expected employment growth over the last three months, a good sign for the office space market. But this growth is barely enough to keep up with the nearly 90,000 new workers entering the labor force each month. That’s why leasing remains an attractive option, especially for start-ups.
Finally, the retail sector is beginning to show signs of life in Long Beach, to the surprise of many who have long desired more stable storefronts throughout the city. Whether it’s space being developed at the Aquarium of the Pacific or as part of mixed-use developments like the Urban Village apartment community breaking ground on Long Beach Boulevard in March, new retail is coming in 2013. Whether it can last, however, might depend on just how much local residents pull back on their spending now that the payroll tax cut has expired.
Single-Family Market: The Return Of The Equity Sale
What has been reported nationally about the resurgent single-family housing market and the reasons for its recent growth spurt undoubtedly applies to California. Low inventory, rising median sales prices and a swarm of cash investors are just a few of the explanations, but it’s important to remember that the local market is unique inits own right. From low-income homes to vacation homes, Long Beach in many ways reflects the range of economic and social dynamics at play in the real estate market today.
Housing, in general, is creeping back to pre-recession form. “The market is just booming right now,” said Geoff McIntosh, owner of Main Street Realtors in Long Beach. The median sales price in California increased for the 10th consecutive month in December, settling at about $367,000. An inventory of less than two months accounts for last year’s surge in prices, flipping what had for years been a buyers market into a seller’s advantage. McIntosh said that most listings receive multiple offers these days, adding that the median amount of days a home is on the market before selling has fallen to about 35. Moreover, when considering low interest rates, nearly half of all Californians can afford the median priced home in the state, McIntosh said.
Meanwhile, foreclosures continue to decline, helping to clear out the detritus of properties responsible for the collapse of the housing market. A few years ago, distressed properties – REOs, foreclosures, short sales – accounted for nearly two-thirds of home sales. Now, that figure is more like one-third, or less, McIntosh said. The return of equity sales bodes well for the market, as Americans have long made housing a prime asset of their wealth.
So what’s the bad news? Actually, the caveats are many.
For example, the 27 percent increase in median sales prices in the state last year is not likely to be repeated in 2013. Appraised values can be tenuous to begin with, and the fact that cash investors are flooding the market means asking prices are not only being met, but in many cases exceeded. This has the effect of pushing out first-time homebuyers and homeowners looking to move up, said Kirk Mulhearn, owner of Prudential California Realty – The Mulhearn Group in Bixby Knolls.
Kirk Mulhearn, owner of Prudential California Realty – The Mulhearn Group
in Bixby Knolls, is seen here at the Country Club Gardens, a 72-unit
townhome community he manages. Mulhearn told the Business Journal he
entered the property management sector when the recession caused single-
family home sales to plummet.
(Photograph by the Business Journal’s Thomas McConville)
“It’s very frustrating as a residential broker right now,” he added. The median sales price for Prudential properties in Bixby Knolls last year was $350,000, lower than it was statewide and elsewhere in Long Beach. Mulhearn described residents in Bixby Knolls as more blue-collar, which makes the influx of cash investors and equity purchases unsustainable.
The rise in median sales prices – both Mulhearn and McIntosh said they expect the market to see about a 10 percent increase in prices this year – has some agents readying for a sort of micro-bubble, particularly if inventory remains as tight as it is now. Mulhearn said he is seeing equity investors offer $20,000 and $30,000 above asking price.
Compounding this potential price inflation could be the long-rumored shadow inventory of distressed properties that banks are continuing to hold. But McIntosh doesn’t think it will come to fruition like some have forecasted, if only because the banks are watching the market closely and don’t want to risk sending sales prices south by unloading a bulk of risky properties on the market. “I’m here to tell you it’s not there,” he added.
Whether Washington’s appetite for new tax revenue has been satiated with the recent fiscal cliff tax deal remains to be seen. For example, talk of establishing new caps on the mortgage interest deduction, or eliminating it altogether, would disproportionately impact Golden State homeowners because median prices are higher here than in most other states, McIntosh said.
If there is one trend that highlights the fluctuation in the single-family market in recent years, perhaps it is this: The luxury market is on fire right now, but lower-end properties are short on supply. If inventory picks up and sales price increases remain slow and steady, the market might achieve a better balance by year’s end.
Multi-Family Sector: Boom Days Are Here Again
The days of bust are turning once more to boom in the multi-family sector as new apartment and condo construction continues to outpace growth in other areas of the real estate market. There are many reasons why this sector is marching toward pre-recession activity levels, not the least of which remains the fallout from the bursting of the housing bubble. “From a broker’s standpoint, the market is very hot,” said Steve Bogoyevac, a broker with Marcus & Millichap, “and growing more and more every day.”
The January 2013 Allen Matkins/UCLA Anderson California Commercial Real Estate Survey reports that renewed demand and falling vacancy rates help explain the surging multi-family market. Low interest rates, an easing of finance restrictions and limited single-family housing inventory also play a role. Additionally, Bogoyevac said, rentals remain an attractive alternative to homeownership given the taxes, insurance costs and other fiscal complications associated with purchasing a single-family residence.
New multi-family developments are breaking ground across the South Bay. In Carson, construction has begun on Arbor Green, a 40-unit affordable housing complex located at 21227-21237 S. Figueroa St. The three-story community features covered parking, a computer lab, laundry room and 24-hour security. Many eco-design elements will be incorporated in the completed complex, including solar water heating systems and rooftop photovoltaic panels.
Meanwhile, Western National Realty Advisors recently announced its $46 million acquisition of The Landing at Long Beach, a 206-unit apartment complex located at 1613 Ximeno Ave. And Park 4200, a brand new 32-unit complex located at 4200 E. Anaheim St., will be ready for occupancy in February.
Finally, AMCAL Multi-Housing, Inc., will begin construction in March on Urban Village. The 129-unit, LEED-certified complex located at 1081 Long Beach Blvd. offers studios, one- and two- bedroom apartments, an open courtyard with pool, a fitness area and clubhouse. Urban Village, slated for completion in June 2014, is designed for young professionals, particularly those working at nearby St. Mary Medical Center.
All this movement in the multi-family sector has caused rents to begin rising again. Malcolm Bennett, owner of International Realty and Investments, said his company is testing the market with slightly increased rental rates. If the market can sustain higher prices, it will likely serve to drive more people into homeownership even while keeping rentals a fiscally sound option.
“There is absolutely no problem renting out units,” said Prudential California Realty’s Mulhearn. “There are always more calls than availability.” Mulhearn had been in the single-family market until the recession hit. “We’ve been forced into diversification,” including multi-family property and HOA management, he said.
Kent Williams, managing director at Marcus & Millichap’s Long Beach office, said low vacancy rates across the South Bay make apartments an enticing investment. “Apartment vacancy peaked in the low 5 percent range during 2010 and has since retreated to the low 3 percent area,” he told the Business Journal in an e-mail. “This year, vacancy will continue to dip lower as job creation gains momentum. By year-end 2013, apartment vacancy will fall close to 2.7 percent, enabling operators to lift asking- and effective- rents more than 4 percent.”
Cash investors gobbling up rental properties are a clear indication of just how strong the multi-family market is right now. These same kinds of investors were likely more intrigued by the single-family market just a few short years ago. But as foreclosures and short sales pushed homeowners into apartments, while young families also held off on purchasing a home, multi-family housing took off. Mulhearn said he regularly receives calls from stockbrokers clamoring to purchase apartment units.
Office Space: Waiting On Better Job Growth
Perhaps more so than other real estate sectors, the health of the office space market is a reflection of the broader employment situation across the nation. Though the benefits of job growth might take some time to trickle down to necessity, lifestyle, asset and luxury purchases – such as a home – office space absorption has a more immediate result. But the slow and steady employment gains of the last year mean the market for office space remains relatively flat, said Robert Garey, senior director at Cushman & Wakefield. “When there’s job growth, it creates demand for office space,” he added.
The Allen Matkins/UCLA Anderson California Commercial Real Estate Survey reports that optimism is slowly regaining its footing, even if it still lags behind forecasts for other real estate sectors. “A recovery in commercial real estate always lags a recovery in the rest of the economy,” Jerry Nickelsburg, senior economist, UCLA Anderson Forecast, said in a statement. “What we are observing is typical in this part of the business cycle. After 18 months of pessimism about office and industrial markets, we have now seen six months of optimism.”
Leasing remains an attractive choice for many businesses, Garey said, particularly start-ups, because they provide the flexibility needed to adjust to swiftly changing economic conditions. If you need to expand, leasing is adaptable; likewise if you need to contract.
On the other hand, Garey said, purchasing office space provides a measure of stability for established companies, with the added benefit of showing clients that you’re in it for the long haul.
When it comes down to it, Garey said, choosing whether to lease or buy office space depends on the level of confidence businesses have about their future. And this confidence depends on job creation.
O’Healy said he has recently executed new leases and expansions for a web developer and Scheer USA at office parks in Signal Hill, perhaps a sign of better things to come for the local office market.
Cushman & Wakefield’s 4th Quarter 2012 market survey for the Long Beach Downtown and Suburban markets indicated a slight up tick in office space leased during the calendar year. Downtown, with 22 office buildings at 32,000 square feet or larger, began the year at 82.78 percent leased. By December 31, it was at 83.91 percent.
The suburban market, with more than 50 office buildings with a minimum of 28,000 square feet, gained 2 percent points during the year, going from 80.03 percent occupancy in January to 82.03 percent in December. Within the suburban markets, Bixby Knolls showed the highest percentage increase. It began the year at 75.95 percent occupancy, and ended 2012 at 81.32 percent. Occupancy within the Long Beach Airport Area and East Long Beach/Seal Beach submarkets also showed improvement during 2012.
Industrial: Exports Driving Demand For Space, But Inventory Limited
Trend lines are positive in the local industrial real estate sector, even if brokers, buyers, sellers and lessees are less sure of where the market is headed. The commercial firm Lee & Associates reports that the South Bay market saw nearly 200,000 square feet of positive absorption in the fourth quarter of 2012 and a decrease in vacancy rates for two straight quarters.
Meanwhile, the January 2013 Allen Matkins/UCLA Anderson California Commercial Real Estate Survey reports that expected increases in California exports are driving demand for warehouse and manufacturing space in Long Beach and across the South Bay, with interest coming from China and other Asian markets.
Lance Ryan, vice president of marketing and leasing for Watson Land Company, said the Port of Long Beach’s expansion projects, such as the Middle Harbor redevelopment and Gerald Desmond Bridge replacement, are “vital” for the long-term health of the local industrial market, which is intricately tied to the trade industry.
Orange County-based developer Sares-Regis Group continues to expand its portfolio in Long Beach as it builds out its recent acquisition of former Boeing property at Douglas Park. It recently sold its first industrial building there to Providence Industries, an apparel maker also known as MyDyer. The 91,145-square-foot, LEED-certified building sold for $12.7 million and will accommodate Providence’s relocation and expansion from its current Paramount headquarters. Pacific Pointe North at Douglas Park includes three other buildings, and grading is now complete and slabs have been poured for three more industrial buildings at Pacific Pointe South. Two of these properties – which offer a mix of consolidated uses, providing both office and industrial space – have been committed to unnamed parties. The third building, at 150,000 square feet, is currently available. Construction on all three buildings is scheduled for completion by July.
Like the single-family housing sector, the industrial market suffers from a lack of inventory right now. There is very little new construction of Class A space likely to happen this year in the South Bay, Ryan said, and much of the Class B space available two years ago is now occupied. As vacancy has dropped, rates and concessions have firmed up. “I think the market is tighter than it has been in the last couple years,” Ryan said.
Where the deals are happening, interest remains spotty. For example, Torrance has been pretty active lately, while areas like Bellflower remain behind the curve, said Steve Warshauer, a senior advisor with First Team Commercial.
Brandon Carrillo, an agent with Lee & Associates, said leasing activity is surpassing sales at this time, perhaps a reflection of market uncertainty as lawmakers in Washington continue to negotiate over spending cuts scheduled for March. Nevertheless, Carrillo said the first and second quarter of 2013 are looking stronger than anticipated.
Leasing also suits many businesses in need of industrial space, particularly those in the trade industry. “They want flexibility over time to either expand or contract as their customers dictate,” Ryan said.
But purchases are not unheard of, either. Patrick O’Healy of O’Healy Commercial Real Estate Services in Signal Hill said two warehouse and R&D buildings at 1361 E. Hill St. and 1464 E. 29th St. are in escrow.
Sustained job growth throughout 2013 will likely increase retail consumption, and this is critical for the health of the industrial market.
Retail: Coming On Strong For A Change
For as well as the restaurant industry is doing in Long Beach, the retail sector leaves more than a little to be desired. Whether it’s a lack of destination retail – Shoreline Village tends to attract tourists first and foremost – or the constant turnover of storefronts across the city, Long Beach is pining for something that lasts. Business districts like Belmont Shore and Bixby Knolls offer the best of the best, and corridors like Retro Row and the East Village Arts District serve the city’s eclectic tastes. But for each challenge met, it seems a new one emerges.
“We always have our work cut out for us,” Blair Cohn, executive director of the Bixby Knolls Business Improvement Association, told the Business Journal last month. Perhaps the pay off is coming, though.
Doug Shea, co-owner of Inco Company, said he has seen retail activity pick up in recent months, particularly within the restaurant industry, and that he is optimistic for 2013. He expects rates and loans for new tenants to be priced right.
Indeed, retail in the South Bay has improved markedly during the last year. “Overall vacancy has declined nearly 200 basis points into the low 5 percent area, and further reductions are foreseeable,” Kent Williams, managing director at Marcus & Millichap’s Long Beach office, told the Business Journal in an e-mail. “Improved lending and access to SBA loans are the primary catalysts for an uptick in demand for small retailers willing to occupy dark in-line space. Area vacancy will dip into the mid 4 percent range this year, approximately 130 basis points below the countywide average. Asking- and effective- rents will tick up 1.3 percent and 1.7 percent, respectively, after remaining flat through 2012.”
A number of new retail projects are breaking ground or set to open in the first quarter, as leasing rates and purchasing prices remain stable and financing restrictions ease ever so slightly.
For example, the Aquarium of the Pacific will add 2,000 square feet of retail space this spring. Meanwhile, the ground floor of Urban Village, a 129-unit apartment complex at 1081 Long Beach Blvd. set to open in 2014, will include almost 6,400 square feet of retail space that could serve medical offices and food service.
The Alamitos Bay Partnership, LLC, is redeveloping the northwest corner of 2nd Street and Pacific Coast Highway, which is currently home to an Albertson’s grocery, Hof’s Hut restaurant, City National Bank and Coldwell Banker Beachside. Leases for these tenants have not been renewed. “The anticipated completion of the project will be for the 2013 holiday season,” Allison Lynch, vice president of asset management for Watt Companies, told the Business Journal in an e-mail. Watt is a member of the LLC. “The project will include full renovation of the interior and exterior of the existing buildings and improvements to the common area. Leases for the site have been executed with Gelsons and CVS. We are finalizing a lease with a local restaurateur for the remaining space at the property.”
City National Bank, meanwhile, will move into a temporary office nearby when its current lease expires on February 22. The bank will construct a new, permanent branch office within two blocks of its existing locale, at 6398 E. Pacific Coast Hwy., later this year. “We have told clients that their accounts will automatically be transferred to the new temporary location and no action is required on their part,” spokesperson Debora Vrana said in an e-mail to the Business Journal.
New retail also is coming to 129 W. 5th St. in Downtown Long Beach. The 10,000-square-foot space will soon be the home of Now And Then, a second-hand goods retailer with another location in Orange County. And LGB Express Car Wash, located at 4141 E. Willow St., will hold its grand opening at the end of the month.
“Retail is definitely recovering from the depths of the recession,” said Brian Russell, vice president at Coldwell Banker Commercial Blair Westmac. “But there is a lot of consolidation.” This is particularly true among the nation’s big box retailers. For example, if you want to shop with a national bookseller, it seems the only option left is Barnes & Noble.
Of course, Long Beach lacks the kind of retail centers that typically attract the big box stores, making mom-and-pop retail all the more important to develop. “Retail is very sensitive to location,” Russell said. “So we’re going to see adaptive re-uses.” For many retailers, finding a location that can be renovated, converted and remodeled to service their needs is better than building from the ground up. Sweet & Saucy Shop, a premium bakery in East Long Beach, is a perfect example thanks to its recent purchase of the building at 3720-3724 Atlantic Ave. in Bixby Knolls.
The new Courtyard Long Beach hotel at Douglas Park is opening next month with General Manager Lucas Fiamengo at the helm. The hotel offers 159 contemporary rooms and suites, a business center, fitness center, outdoor heated pool and spa, free Wi-Fi for guests and 2,000 square feet of conference and event space. A bistro and Starbucks espresso bar round out the amenities.
The location and amenities of the new hotel support Long Beach’s convention and tourism industry and the recent focus that has been placed on making the airport complex an entry point for business and leisure travelers. “These developments are a clear indication of the value of having LGB,” said Long Beach Airport Director Mario Rodriguez, referring to the airport by its call sign.
Guest room accommodations and public meeting space also bring an added dimension to the city’s convention and tourism portfolio, while giving visitors easy access to Long Beach destinations. “The new Courtyard Long Beach at the airport is going to provide the traveler with a moderately priced hotel in that part of our city,” said Steve Goodling, president and CEO of the Long Beach Area Convention and Visitors Bureau. “It’s an important geographic area of our city because it’s adjacent to the 405, as well as the Long Beach Airport. We get a lot of visitors and others who are traveling the freeway that are looking for a convenient location to sleep for the night or spend a few days as they explore the southland.”