By Samantha Mehlinger - Staff Writer
May 07, 2013 - Increasing demand for single-family homes continues to be exacerbated by an ever-shrinking inventory as the real estate market is midway through its second quarter. Long Beach agents are seeing bidding wars cause the median price of homes to appreciate at an accelerated rate.
“We definitely saw this light switch go on and all of a sudden buyers are out in droves,” says Russ Caldarella, an agent with First Team Real Estate. He notes that any typical open house in Long Beach right now gets a ton of traffic. “Gosh, anywhere from 25 to 75,” he says of the number of people going through a given open house.
From a realtor’s perspective, he says, “What it looks like is, you’ve got many buyers that you’re working with putting offers in on properties. It can be very frustrating for buyers right now because only one person is getting a house, where you might have anywhere from 10 to 25 offers on a piece of property.” He adds, “As I like to say, qualified to buy, but nowhere to go.”
Gary Painter, director of research at the USC Lusk Center for Real Estate, told the Business Journal that the dynamic of high demand and low supply does not necessarily indicate growth. He explains that due to shrinking inventory, the market is moving “very quickly, which is good for those who are trying to sell.”
Painter elaborates, “But at the same time, you might not call that growth in the housing market.” When considering the increase in median price for a home, he says, one might get the impression of growth. “But overall, it’s still not a normal market in respect to inventory that’s transacting and so forth.”
Multi-family continues to experience lower inventory as well, although not to the extent of the single-family market. Painter predicts rent will increase as demand continues to be strong. “I think for the very short run you’ll still see price pressures on rents because of the number of people who have actually been reducing their housing demand by living with their parents longer or doubling up,” he explains.
The most recent apartment research report by Marcus & Millichap shows vacancy rates at a tight 3.7 percent in the Greater Los Angeles area. The South Bay sports an even slimmer rate at about 3 percent even.
California’s Employment Development Department (EDD) calculates state unemployment decreased to 9.4 percent in March from 9.6 percent in February. The EDD’s Los Angeles-Long Beach-Glendale report for that time period shows L.A. County’s unemployment dropped from 10.3 to 10.2 percent in the same time period.
Robert Kleinhenz, chief economist at the Los Angeles County Economic Development Corporation’s Kyser Center, observes that despite the one-tenth percent monthly rate of decreasing unemployment in L.A. county recently, the amount of jobs added within nonfarm sectors is better than it seems. “The L.A. county economy was really stuck in neutral, say at the beginning of last year, but by middle of last year the pace of job growth has accelerated to where L.A. is now adding wage and salary jobs at a faster rate than the nation as a whole.” According to the EDD, these numbers translate to a nonfarm employment increase of 23,700 jobs from February to March.
While trade, transportation utilities, and manufacturing saw job losses from February to March, demand for industrial space is still high. Perhaps this is because, according to Kleinhenz, “I have a hunch that’s just a seasonal low and that we’re going to see things come back as we go further into the year.”
Demand for Class-A space led to a negative absorption in the industrial market, as construction of 1.3 million square feet of space was introduced to the South Bay market to meet that demand. According to CB Richard Ellis (CBRE), most of this construction is concentrated in Long Beach.
Kleinhenz quotes a vacancy rate in L.A.’s industrial market at around 4.4 percent. “They have been, and continue to be, among the lowest in the country,” he says of the county’s vacancy rates. Long Beach, on the other hand, has a current vacancy rate of about 7 percent, he notes. A report by Lee & Associates attributes the uptick to the introduction of significant square footage to the Long Beach submarket.
While the majority of the L.A County’s job growth from February to March occurred in the professional and business services sector, the office market is not yet seeing a corresponding increase in demand. Some agents, like Becky Blair, president and principal of Coldwell Banker Commercial BLAIR WESTMAC, believe slow demand in the office market persists partially due to the continuing trend of businesses consolidating space rather than expanding.
A first quarter survey of the office market by Cushman & Wakefield indicates both the downtown and suburban markets in Long Beach experienced negative absorption. The South Bay accounts for 18 percent of vacant space distribution within the greater L.A. area, according to a first quarter office report by CBRE. Vacancy in the South Bay increased by one and a half percent, partially the result of the addition of new space on the market, as in Douglas Park.
As more individuals gain jobs and begin to feel more stable in their finances, they will be more likely to spend on retail. In Long Beach, Kleinhenz says, “The unemployment rate was 10.9 percent for the month of March this year compared to 12.4 percent a year ago in March 2012.” Year over year, unemployment in L.A. County as a whole dropped 1.3 percent, while in Long Beach it was a slightly higher at 1.5 percent. “A much needed improvement has taken place,” Kleinhenz says.
Doug Shea, principal and boardmember at INCO Commercial, says that on the retail market, “There is a giant lack of inventory of properties for sale. For commercial, there is hardly anything going on the market right now.” Demand, he says, is primarily from buyers. “Demand for leasing right now is a little bit flat,” he says, citing “over-priced” leasing rates as the cause.
According to a press release by the UCLA Anderson Forecast, Senior Economist David Schulman’s research indicates, “the housing sector, which led the downturn, is now leading the recovery.” Whether or not inventory will improve in the coming months remains to be seen, as banks continue to hold onto distressed properties as their values appreciate, and homeowners looking for a better return on their property investment do the same.
Market Blossoms With Roots In Unhealthy Inventory
If inventory of single-family homes was low in Los Angeles County and the state last quarter, it’s even lower now. Coupled with high demand from buyers looking to get into the market while prices are still below the pre-recession highs, the continuing downward trend in inventory makes for what is now a very clearly defined seller’s market.
Geoffrey McIntosh, broker and co-owner of Main Street Realtors, iterates these market conditions. “We have a dramatic shortage of inventory right now. There is far more buyer demand than properties on the market.” As a result, he says, “If anything comes on the market that’s appropriately priced, the sellers are seeing multiple offers.” He says this trend is occurring citywide.
Phil Jones, broker and owner of Coldwell Banker Coastal Alliance, says the current L.A. County market is experiencing “an extreme shortage” in available homes. The high demand is reflected in a shorter median number of days homes are sitting on the market, which Jones cites as 54 days, a decrease from 85 in March last year. McIntosh estimates an even greater decrease at 34 days on the market.
Jones provides some numbers to illustrate just how low inventory is right now. “Last year at the end of March in Long Beach for single-family, townhomes and condos, there were 1,293 listings. At the end of March this year, there were only 417 total listings in our city.” This translates to 1.4 months of supply, “which is alarmingly low,” he says.
Due to the combination of low inventory and what he calls “pent up demand,” median home prices are increasing at a rapid rate. Jones cites the 90808 zip code as an example, noting that as of the end of March there were only 29 homes on the market in that area. “There is less than a month’s supply of inventory, and as a result the median sales price in 90808 increased March over March by 20 percent.”
McIntosh also notes that within Long Beach as a whole, “the median [price] is actually somewhere in the neighborhood of 20 percent over a year ago.” He cautions not to take these numbers at face value. “That’s a little misleading because what we’re seeing is a shift in the inventory we’re selling. We’re seeing more higher end homes sell, which causes the median to increase. People are confused by that. They think their house is worth 20 percent more than it was a year ago, but it’s not,” he explains. Still, “if you compare neighborhood to neighborhood, prices are up pretty significantly,” he says.
Increasing median price may not necessarily be a solid win for the housing market. Of the sharp price increases, Jones comments, “While that is good news for the homeowners, it is not great news for homebuyers. But more importantly, it’s an unsustainable rate of increase. We really need to see more inventory to be a more healthy market overall.”
Kleinhenz of the Kyser Center states that L.A. County had one of the fastest rates of increase in median home price over the past year. While this is partially an indication of a healthier economy, it also points to restrictions within the market. “A lot of that price appreciation is driven not necessarily by healthy fundamentals but because there is a really tight supply, both with respect to distressed and non distressed properties at this time,” he says. He explains the process of selling a lender-owned home is lengthy, which holds up inventory.
Jones points out that banks are holding onto distressed properties. “Banks are acting in their own best interest, which is a benefit to their shareholders, and not releasing these properties,” he says, explaining that banks are holding onto properties in the hopes that they can later sell them for a higher price.
Market analysis by the California Association of Realtors (CAR) suggests that the single-family market is in a much healthier place than it was when the market began declining in 2006. CAR compares figures gauging financial responsibility of single-family buyers in 2006 to figures from 2012. The findings suggest a more stable market. While 2006 saw 21.1 percent of buyers with zero percent down payment on their purchase, 2012 saw only 4.6 percent. In 2006, 43.3 percent of buyers took out a second mortgage, while only 1.8 percent had a second mortgage in 2012.
The percentage of buyers with adjustable rate mortgages also declined significantly, from 32.6 percent in 2006 to 3.5 percent in 2012. Perhaps the best indicators that home investors are more responsible are the number of buyers with a 20 percent down payment, which totaled 54.4 percent of homebuyers in 2012 as opposed to 43.2 percent in 2006. 30 percent of homebuyers paid cash last year, while only 11 percent did so in 2006.
CAR also reports “fierce market competition” will prevail in California throughout 2013 due to the low inventory of homes. The association also notes buyer competition is even tougher in areas with a large concentration of bank-owned (REO) sales.
Multi-Family Continues To See High Demand
Over the past quarter, the multi-family market continued to experience increased demand and decreasing vacancy rates with strong interest from buyers. Year-over-year, vacancy rates in Long Beach dropped 50 basis points last quarter to 3.8 percent, according to an apartment market research report for the second quarter by Marcus & Millichap.
Eric Christopher, senior associate and apartment specialist with INCO, says at the height of the recession the vacancy rate for multi-family homes in Long Beach was about 7 to 8 percent. Job losses, he says, had many people “crashing on someone’s couch” or “moving back home.”
Christopher elaborates on the economic factors behind the dropping vacancies. “What has happened since 2011 is we’ve added back some jobs. There’s been a little bit of improvement in the economy, so the first thing you are going to do is move back and get your own place, right?”
Mike Dunfee of the Mike Dunfee Group and a director for DOMA Properties, estimates the occupancy rate of condos in Downtown Long Beach to be 95 percent, with 65 to 70 percent of properties owner-occupied and the balance is tenant-occupied.
Increased occupancy drove up rental prices last year. The Marcus and Millichap report cites a 6.8 percent increase in rents year-over-year. Steve Bogoyevac, vice president of investments for the company, believes the rate of increase is slowing down. “I think they kind of leveled out at the end of last year,” he says. Marcus & Millichap quotes the current median rent as $1,445 per month.
While rates are lower than in the rest of South Bay, which boasts a median of $1,810 per month, Long Beach’s rents increased by 1.2 percent more than the South Bay’s. This difference is driven by a greater demand in the Long Beach market, which experienced a higher drop in vacancy rates year-over-year. Today Bogoyevac says a vacancy typically sees multiple renters vying to fill the space. ‘That’s still going on, which is why we are going to see rents be driven up.”
Christopher notices a similar dynamic in the multi-family market to that of single-family. “The trend right now is probably best defined by buyer aggressiveness, or let’s say there is an imbalance of buyers in the market,” he says.
Dunfee estimates 34 percent of interested parties on the market are cash buyers. He suggests people may be looking at multi-family as a better investment opportunity than others. “They will buy this rather than get less than one percent in a CD. They are able to get a better return on just owning a condo, with anticipated appreciation. Or they can just rent it out and get a higher monthly return.”
One reason more people are looking to invest in multi-family is that it offers less risk than other opportunities, says Christopher. “The word is out on apartments. It’s always been a great storehouse of value. You have to work a little bit at it, but you aren’t going to lose 50 percent of your investment in 18 months like has happened in the stock market.”
In terms of the makeup of these buyers, Bogoyevac says, “There are local guys and there’s international money. There are buyers paying with cash, and there are buyers getting incredible financing which is available now.”
Bogoyevac cites higher-end buildings are more popular for buyers. “I would say that the trend is that there was a very heavy interest in the A-location properties,” he says. “The trend goes with the A’s, and as that gets way too competitive people start slipping down to the Bs, and downward it goes.”
Construction In The Industrial Market Concentrates in Long Beach
The Greater Los Angeles County industrial market is seeing an increase in construction rates, with an estimated 3.9 million square feet currently under construction. An industrial market report by CBRE covering L.A. County shows the South Bay carrying the bulk of this space with 1.3 million square feet in development. Long Beach’s Douglas Park and Watson Center developments account for the majority of this square footage. CBRE handles leasing and sales for part of the Douglas Park project.
The introduction of new product on the marketplace caused an increase in vacancies; Lee & Associate’s quarterly industrial report notes the vacancy rate jumped from 4.5 to 6 percent. Negative absorption in the South Bay totaled 138,961 square feet.
Brandon Carrillo, senior associate at Lee & Associates, elaborates on the report: “We saw about a million-and-a-half square feet delivered between the fourth and first quarter last year and this year. With the additional supply we got that blip in regard to the demand,” particularly in the Douglas Park area and in Carson.
“There’s a big demand for our product,” he says of industrial space in Long Beach. “What we’ve been tracking is a huge demand for quality distribution warehouses with all the bells and whistles.” CBRE emphasizes that development in the South Bay is made up of Class-A buildings, which are each at least 100,000 square feet.
Lance Ryan, vice president of marketing and leasing of Watson Land Company, says vacancy of industrial units in Carson has dropped significantly over the past quarter. He attributes increasing demand to development within the city. “At the beginning of this year there was an expansion of the overweight corridor. That was the big news for us and affected most of Watson Industrial Center and some other surrounding industrial properties.” He continues, “Some new leases have occurred as a result of that.”
The demand for industrial in Carson is so high, he says, “Right now we have some of our lowest vacancy on record.” While the holiday season at the end of the fourth quarter typically experiences a rush in demand and a corresponding dip into the first quarter, he observes, “What we saw this year was a lot of that product, that demand and that need, remained into the first quarter.”
The industrial market also faces the low inventory and increased demand plaguing much of the real estate market. “On the sales side, there is a huge shortage,” Carrillo says. Small Business Administration (SBA) financing and low interest rates are driving these investments, which Carrillo says make it “the user’s advantage to buy versus lease. Whereas before the SBA created these more favorable terms, it was still slanting towards leasing versus a purchase.”
Steve Warshauer of First Team Real Estate provides some insight into how smaller industrial properties are faring. Based on the past quarter he sees an “increased interest and increased activity,” noting that he has been getting more calls and offers on listings. Like Carrillo, he says more are looking to buy than to lease.
Warshauer tends to work in smaller and mid-sized buildings in the Class-B and C markets. “That is a pretty hot market right now. If you’ve got a 5,000 or 10,000-square-foot building or even smaller, and you put that on the market at anywhere near what it’s worth, it’s going to get some activity. It’s going to get sold.”
Warshauer says part of the reason smaller buildings are doing better is that there is a much smaller inventory of these because Class-A structures are primarily what is being built right now. “It is creating some vacancies in the older, larger properties.” Carrillo sees the same issue. “The problem is trying to figure out what to do with our out-of-date, functionally obsolete product.”
Overall Carrillo says, “Things are picking up toward a healthy market with half sales and half leases; the market is recovering to where we are getting back to that ratio.” CBRE’s report estimates that while rent rates increased by only about one cent last quarter, increased construction and lower vacancy rates predicted for the remainder of 2013 will likely spike up rents about 6 percent.
Office Space Sees Negative Absorption
Both the downtown and suburban Long Beach office markets saw negative absorption this quarter, according to the first quarter survey by Cushman & Wakefield of California, Inc. An office market report from CBRE notes this is the first in eight consecutive quarters that Greater Los Angeles has seen negative absorption as well as increased vacancy. The majority of this negative absorption took place within the South Bay.
Cushman & Wakefield reports that Downtown Long Beach experienced a negative absorption of 30,278 square feet from fourth quarter of 2012 through the first of 2013, while the suburban market saw negative absorption of 34,175 square feet. However, the report also states the suburban Long Beach market saw an increase in leasing activity of 46.5 percent from last quarter.
Some of this negative absorption may be accounted for by the addition of office space in Douglas Park, which continues to be developed and pique interest. Robert Garey, senior director with Cushman & Wakefield, notes “that there is a little bit more activity and also some renewed interest in the Douglas Park development, which I think will help spur more activity along the suburban Long Beach market. I do think the Douglas Park Development will be more of a catalyst for activity overall.”
Downtown’s Molina Center, the 200 and 300 Oceangate towers owned by Molina Healthcare, is also injecting some activity into the marketplace downtown. Founder of WM Commercial, Toliver Morris, states, “I think one of the big helpers in the office market is Molina’s purchase of the previously-named ARCO center, and they continue to fill that space as space becomes available within that building.”
Blair of Coldwell Banker Commercial BLAIR WESTMAC spoke with the Business Journal and Morris in a conference call. She adds that Molina’s Millworks project on 6th Street and Pine Avenue will create more inventory on the market as well. Adding more space may mean we continue to see negative absorption in the marketplace, but Blair is optimistic that these spaces will be filled quickly. “That’s going to add another 200,000 square feet of office that hopefully will be filled as soon as it is finished.”
Morris points out that the Class-A market is “pretty solidified and stable,” considering the introduction of Class-A space at Douglas Park and the Molina Center buildings. “Landmark Square and Shoreline Square are very stable, with the exception of the World Trade Center, which has been kind of in a state of flux over the past 18 months or so with the port [considering moving to the WTC],” he observes.
The Los Angeles-Long Beach-Glendale metropolitan division of L.A. County experienced moderate employment gains in the professional and business services sector, totaling 6,500 additional jobs from February to March of 2013. Continued job growth in this field could mean increased demand for office space in the months to come. However, because this increase is relatively modest, it is unlikely there will be a huge spike in demand. Cushman & Wakefield’s Garey puts it succinctly: “Employment triggers demand for office space. We have seen some increases, but it’s not robust enough to create driving demand for more office space.”
Garey believes the market will continue at a steady pace this year, without sharp increases or decreases in vacancy. “Until we see a shift in our economy I do not anticipate that we are going to see any significant change.”
Blair says businesses continue to consolidate their space rather than to expand, which also accounts for unenthusiastic demand. “One of the reasons office leasing is not moving quite as swiftly as we would like is that a lot of companies are consolidating their space.”
Morris is slightly more optimistic about a potential increase in demand within the market. “I think we’re starting to see more inquiries and a lot more people looking, and more tenants growing and expanding. So I think we are going to see an uptick,” he speculates.
New Restaurants On The Rise As Retail Market Holds Steady
The retail market is holding steady, although perhaps not experiencing any significant growth as the job market in the L.A.-Long Beach-Glendale area continues to increase at a glacial pace, according to EDD statistics. Retail grows only as fast as the improving job market enables more consumers to flex spending power.
Brian Russell, vice president of Coldwell Banker Commercial BLAIR WESTMAC, predicts demand for retail space will increase as the economy grows. “I think people are starting to feel more confident about their jobs and the economy in general. There is still some tentativeness, though,” he says. While he is starting to see more vacancies fill, he says retail is still “a challenging market.”
So far this year, Russell says, “I believe in the first quarter we’ve seen some nice pickup in retail activity. We have started to see some people come back into the marketplace, which means some vacancy is being leased up.”
According to a report by CBRE, the first quarter of 2013 closed with a retail vacancy rate of 6 percent within Greater Los Angeles. Retail space within the South Bay makes up 9 percent of physical vacant space in the market with a total vacancy rate of 3.7 percent, lower than most other L.A. submarkets.
INCO’s Shea says that while “Demand for purchase is high,” demand to lease is low. “That’s largely a reflection of over-priced leases,” he asserts.
Certain areas and centers in Long Beach are seeing more demand for retail space than others. “That’s really a function of household income,” Russell says. Areas with higher household income, like Belmont Shore and East Long Beach, are seeing more demand and lower vacancy for retail space. “Central Long Beach and perhaps some of North Long Beach struggle,” he says.
One area that has seen significant improvement in retail occupancy and demand is Bixby Knolls. “I am a big fan of Blair Cohn,” Russell says, explaining he attributes the revival of retail in Bixby Knolls to efforts by the Bixby Knolls Business Improvement Association (BKBIA), of which Cohn is the executive director. He says efforts by Cohn and BKBIA have greatly revived the Bixby Knolls and California Heights areas to the point where “there is very little to lease.”
Both Russell and Shea have seen increased demand from restaurants. Shea remarks, “The most phone calls I am receiving right now are from restaurants coming and going.” Belmont Shore, for example, has added two restaurants along 2nd Street since February. Construction is currently underway at 2nd and Corona on a Baja Fish Tacos at the previous location of Sweet Jill’s (which relocated elsewhere on 2nd).
Shea predicts that “we are still going to see a lot of the same . . . a lot of restaurants wanting to come into the region and flat-lining on leasing for other types of retail.”
Shea’s prediction gains traction when looking at the breakdown of job gains in the greater L.A. area from February to March. The EDD report for the L.A.-Long Beach-Glendale area notes losses of jobs in retail and wholesale trade. CBRE’s retail report says retail sales in the discretionary categories such as electronics, sporting goods, furniture stores and department stores, all decreased in February in the greater L.A. market. However, the EDD reports leisure and hospitality, in which food services are categorized, experienced increased job growth from February to March.