Price and cap rate trends by property type and county
(Editor’s note: This is the second installment in a two-part series examining demand for commercial space in Los Angeles. The first installment ran in the Nov. 10 edition of the Daily Press.) Since bottoming out nearly a decade ago, prices for all property types in the Los Angeles Basin have more than doubled. For apartments, they have nearly tripled.
The following are some factors that will influence future prices: ■ Interest rates. Most investors currently assume an increase of approximately 100 to 150 basis points over the next two years, and this has already been built into the pricing. Any shift above or below this level would cause prices to shift accordingly. ■ The economy. The Blue Chip Consensus is that the economy will grow at a moderately strong pace in 2005 and 2006 (approximately 3.5 percent per year). Growth rates above or below this pace would also impact pricing. ■ Returns from alternative investments. ■ Construction trends. Currently, construction is relatively restrained. Any significant up tick could reduce the attractiveness of the Los Angeles Basin real estate investment.
INDUSTRIAL The spread between industrial cap rates and 10-year T-Bill rates has dropped in 2004, but still remains generally in the range witnessed in the past 10 years, and above the spread witnessed in 1990. As can be seen below, industrial prices across Southern California counties have generally paralleled each other, with the small exception of a higher-than-normal recent run-up in prices in Orange County, particularly among small buildings. Prices have always run the lowest in San Bernardino and Riverside Counties and highest in Orange County. Today, the spread between the areas is 63 percent. In 1990 it was 47 percent. Part of the reason is that Orange County has run out of vacant land in the past 14 years. It also implies that Orange County may be at greatest risk of a correction.
OFFICE The pattern for office cap rates versus rates on T-Bills generally follows the pattern discussed for industrial, with a recent shrinkage in the spread, but still generally in-line with long-term trends. Trends in sale prices by county have generally paralleled each other, although prices per square foot in Ventura and Orange Counties have generally caught up with prices in Los Angeles County. Prices in San Bernardino and Riverside Counties still remain approximately 33 percent lower than in Los Angeles.
APARTMENTS The spread between apartment cap rates and T-Bills has dropped sharply in 2004, as cap rates have continued to fall and as T-Bill rates have climbed. The spread is not inversed, as in 1990, but the lack of much distance suggests some caution by the investor. However, as pointed out in the survey conducted of NAI brokers, the apartment market in the Los Angeles Basin is widely expected to tighten even further in 2005.
This will drive up rents, which in turn will place upward pressure on prices in the future. Prices per square foot for apartments in Ventura, Los Angeles and Orange Counties have all tracked near each other for at least the past 14 years, with prices currently the highest in Orange and Ventura Counties, followed closely by prices in Los Angeles County. Prices in San Bernardino and Riverside Counties have consistently run approximately 40 percent below those of the coastal counties.
RETAIL Trends regarding the spread between cap rates for retail and T-Bills have generally followed the trends already discussed for industrial and office. Growth in prices per square foot has been particularly strong in Orange County in recent years. Prices there now average approximately $275 per square foot, which is 27 percent higher than in Los Angeles and Ventura Counties. This implies that the possibility of a correction in prices is slightly elevated in Orange County at this time. However, the outlook for market conditions in Orange County is very strong.
At the other extreme, prices in San Bernardino and Riverside Counties are running approximately 18 percent below prices in Los Angeles and Ventura Counties.
It has generally held this spread for the past 14 years, due, in large part, to more developable land in San Bernardino and Riverside Counties than in the coastal areas. The information given in this article is for informational purposes only and not meant to be taken advice. (The above is an excerpt from NAI Capital’s third annual broker survey. Christina S. Porter is in the business of leasing and selling office and industrial buildings. You can reach her at (310) 806- 6104 or e-mail at)
Originally published in the Santa Monica Daily Press print edition on November 17, 2004. Read the original PDF.