Sharp Jump Is Forecast in Commercial Building

Tightening supplies of office and industrial buildings along with rising construction costs contributed to a decline in the number of business expansions in Southern California last year, but the robust economy probably will bring a burst of activity in 2006, according to a study to be released today.

The 252 major business expansions were a drop of 28% from 2004, according to a report from the Los Angeles County Economic Development Corp., a trade group devoted to attracting business to the region.

Office vacancy rates have been declining across the five-county area since the second quarter of 2004, according to the study. Vacancy rates for the fourth quarter ranged from 11.2% in Los Angeles County to 7% in Riverside and San Bernardino counties.

Industrial vacancies were tighter still and fell to 2% in Los Angeles County in the fourth quarter, making it the best market for landlords in the country but a difficult one for companies in need of room to expand. Riverside and San Bernardino counties came in No. 2 nationally at 2.7%.

“It’s getting harder to find space,” said Jack Kyser, chief economist for the LAEDC.

The number of business expansions tends to vary from year to year, but was probably also impeded in 2005 by fears that catastrophic hurricanes including Katrina would be a heavy drag on the economy, Kyser said.

But the economy remains strong even though the residential real estate market is cooling, Kyser said. Businesses are in a mood to expand in Southern California and commercial real estate development should pick up, he said.

“Business has pushed employee productivity as far as it can go and will now have to invest in plants and equipment and hire people in order to expand,” Kyser said.

Although there were fewer deals, the total investment value including rent of major business expansions in the five-county region was more than $1.9 billion in 2005, a 5.6% increase from the previous year, the report said.

Riverside and San Bernardino counties claimed the biggest improvement with a $287-million boost in investment compared with a $7.8-million increase in Los Angeles County. Ventura County was off by about $1.8 million and Orange County took the biggest fall, $222 million.

Professional services such as law, accounting and architecture accounted for the most expansions, followed by logistics, which is the transportation and warehousing of goods.

Declining vacancy and rising rents should push developers into building more properties, but rising land and construction costs could short-circuit many projects, the report said.

The LAEDC is also concerned about the erosion of industrial space in Los Angeles County brought on by the conversion of older properties to residential and retail uses.