If California was an independent nation, its economy would rank in the top ten in the world (Governor Schwarzenegger likes to claim the sixth spot, though most studies suggest eighth).
Long the largest economy in the US, its position as a critical economic engine has grown with the rise in imports from China. The area’s major ports – Los Angeles and Long Beach – grew 7.7% in volume in 2005-6, as they carried two thirds of the West Coast’s international trade. Electrical apparatus is California’s largest import, and China its largest partner.
On September 25, RICS along with the Appraisal Institute hosted a panel discussion focused on the current and future condition of the real estate market in Southern California.
Moderated by Raphael Bostic FRICS, Director of the Master of Real Estate Program at the University of Southern California, the diverse group each shared their perception of the market and was able to come up with similar themes.
Of particular interest was the affects of the Southern California market on not only North America, but the Caribbean and Asia as well.
John Ellis FRICS, Managing Director, Integra Realty Resources told the audience that he expects this economic growth to continue, with trade and international commerce dominating.
He noted some risk that California would run out of space around the ports. Los Angeles has some of the lowest industrial and warehouse vacancy rates in the country, and projected growth suggesting a need for at least 3,600 additional acres for storage – but also noted high vacancy rates inland.
Some of the real estate economy – notably residential, in overgrown places like San Diego – may be due for a correction.
August brought a dramatic slowdown in house sales activity, exacerbated by the credit crunch, but California residential markets have always been volatile relative to the rest of the US.
Moreover, a housing price drop – after a sustained run-up of nearly 9% per annum median price for 36 years – was hardly unexpected.
Beyond residential, though, the RICS-AI panel agreed that news of major trouble in the broader California real estate markets is overstated, and the California economy remains robust.
Panic over the subprime crisis has subsided. Everett Allen Greer MRICS, Senior Vice President, Bank of America believes that the California commercial market is generally healthy, with vacancy flat or declining, and realized rents rising.
Stan Mullin FRICS, Senior Vice President Grubb & Ellis agrees that there may be a financing crisis, but there is no real estate crisis. Demand is still strong, and California will always be perceived as a safe haven. He notes that limited financial accountability has allowed both lenders and borrowers to be irresponsible.
Greer agrees that a slowdown in the CMBS market – which financed 65-70% of real estate in the US in 2006 – would slow the development momentum, but, like many in finance communities, assumes that other vehicles will support California.
The reality, as the panel noted, is that the cities of Southern California are not one-industry cities, like Houston.
Thus California has not suffered a real estate collapse since the speculative boom of 1888. Moreover, in times of general market uncertainty, funds flee to safer investments – and California, with its unique coastal position, has long been viewed as a safe haven for property investment.
An audio recording of the event is available for download, email ltait@rics.org for details.
