Commercial real estate to remain in trough in 1994; affordable housing sector may see uptick in activity.

The apparent consensus within the L.A. County real estate community is that local commercial property markets aren't likely to improve much -- if at all -- during the coming year.

"If we're not at the bottom, we are certainly near the bottom" of the local commercial real estate cycle, concluded Ted Leary, vice president with developer/asset manager Lowe Enterprises.

Echoing other experts, Leary noted that the current Southern California real estate recession is related as much to structural changes in the regional economy as it is to general economic swings. "I wish I was smart enough to say how long we'll remain here," he added.

On a brighter note, some of the county's most influential residential real estate professionals said they're expecting continued gradual improvement in home sales activity next year, particularly in the affordable sectors. But few are projecting any substantial uptick in residential property values -- some even said we're yet to see the cyclical bottom.

"I expect activity levels to be better than they have been, but prices may still have a little way to go" before the market bottoms out and values start recovering, commented George Rathman, chairman of mega-brokerage Prudential California Realty. "I'm looking forward to a good 1994. We may not see a dramatic improvement, but that's okay -- we shouldn't expect big (market) swings," he added.

At least one prominent local real estate executive said he is optimistic about the coming year. "L.A.'s new mayor is business oriented; the new state workers' compensation legislation is business oriented; the state is starting to fight to retain our businesses and recruit more," said Jon Douglas, chairman of residential brokerage Jon Douglas Co. "So, I'm not so sure we'll have to wait until 1995 to see a real estate recovery get under way."

With the notable exception of the oversupplied downtown L.A. market, increasing sales activity seems to be the most-discussed trend emerging in the local commercial property arena. Burgeoning investment activity in recent months -- much of it driven by institutional sales of foreclosed properties -- is finally clarifying market prices, several sources noted.

"Lenders don't want the assets on their books, and they'll be selling them for whatever the market will bear," said Tim Macker, president of West L.A.-based Westmac Commercial Brokerage Co. "We're now getting requests for inventory data from people who have been out of the market for three years or more."

As more stringent reserve ratios go into effect next year, insurance companies in particular will rank among the most active sellers of local commercial properties, predicted Larry Kosmont, president of the Burbank-based Kosmont & Associates real estate consultancy.

Insurers "have invested in blue-blood properties -- malls, hotels, highrises -- so we'll see some surprisingly trophy-like properties hit the market," Kosmont elaborated. And as down-market prices can frequently generate enviable current yields, "there's lots of venture capital coming back into the marketplace -- so 1994 will be a very interesting year," he added.

As sellers of Southern California properties "will have to meet the expectations" of the vulture-type investment groups that have been aggressively gobbling assets in other troubled markets for years, "some people will be shocked by the numbers we're going to see" with 1994 transactions, Leary commented.

Commercial property sales activity has been meager in recent years, in part because would-be sellers simply haven't faced up to the reverse sticker-shock, Leary continued. "We're no longer facing a liquidity crunch; it's a value-recognition crunch," he stressed.

Richard Plummer, a broker specializing in investments at brokerage giant Cushman & Wakefield Inc.'s downtown L.A. office, noted that owners have finally begun to face the depressing mood music. "The spread between the ask and bid prices is narrowing," he noted. "But the buyers really haven't moved; it's the sellers that have come down," Plummer explained.

In addition to the bullish domestic vulture funds, non-Japanese Asian entities will likely play prominent roles in the local commercial real estate investment arena next year, Plummer added.

But as Equitable Real Estate Vice President Tino Argimon pointed out, the region's biggest office market -- downtown L.A. -- "will be the last to see any new investment." During the coming year, downtown landlords will remain plagued by an oversupply of space stemming from an unprecedented highrise development wave and a downsizing tenant base, Argimon and others lamented.

Owners are expected to compete aggressively amid soft demand and an abundant supply of vacant downtown space, including major blocks that shrinking tenants are attempting to sublease, added John Torgeson, who manages CB Commercial Real Estate Group's downtown brokerage office. These conditions stand to put additional pressure on effective rental rates, which have already fallen substantially, he and other downtown property pros noted.

"Banking and legal mergers are still affecting market rental rates," said Bob Caudill, who is launching his namesake brokerage the first week of the year. "We won't see rents increase next year; the best we can hope for is stabilization," he elaborated.

The real estate industry will watch two "holes" in the downtown market with particular interest in 1994. One is the 700,000 square feet that formally hits the market in late 1993 when the former Security Pacific Bank's lease expires at the big highrise now known as Security Pacific Plaza.

"A lot hinges on the fate of that space," Argimon opined. A relocation deal there with Times Mirror Co. -- which is thought to be negotiating for about 350,000 square feet -- or another big anchor tenant "would go a long way toward determining whether the downtown market will begin recovering in 1995 or 1996," he added.

The other "hole" to watch is the 350,000 square feet of sublease space at Wells Fargo Center that IBM Corp. recently put on the market at bargain-basement rates.

"IBM is the new price leader downtown," Caudill commented. As the new year begins, downtown tenants are trying to market empty sublease space representing 6 percent of the entire downtown "Class A" highrise market, said Joe Faulkner, senior vice president with CB Commercial.

Several of the development teams behind the recent highrise construction wave still have never-occupied space to market, and their leasing packages will continue to adjust to the competitive environment, several sources noted. They'll also face competition from the new owners of the entirely empty 330,000-square-foot 1100 Wilshire building in the Central City West district.

Representatives of that tower's Taiwanese owner, Format Corp., have indicated they'll target a segment of the market that will also make downtown news in 1994: government agencies. Several local and federal agencies have requirements likely to be accommodated next year, and the state's real estate team will pursue its plans to renovate and occupy offices on and around the historic Spring Street corridor.

Through mid-April of 1994, the Metropolitan Water District is scheduled to negotiate for a 600,000-square-foot "build-to-suit" complex at Union Station -- where construction of the Metropolitan Transportation Authority's headquarters is currently under way and will progress through the year.

The outlook is significantly brighter for most commercial centers on L.A.'s Westside and the "Tri-Cities" submarkets, but Hollywood, Mid-Wilshire and most South Bay submarkets won't see much recovery in 1994, most industry insiders agreed.

Santa Monica and West L.A. office properties should continue to see encouraging demand from the entertainment industry, said principal Howard Feuerstein of brokerage Corporate Realty Associates Inc.

Westmac's Macker said he also sees continued strength in the Beverly Hills "Golden Triangle" -- bounded by Santa Monica and Wilshire boulevards and Beverly Drive -- and expects vacancies to keep falling in the bargain-priced Culver City and Marina del Rey districts. "The submarkets with an overhang of space may see further rent depression" next year, Macker added.

In the Tri-Cities submarkets -- Burbank, Glendale and Pasadena -- rents might start to rise, as office vacancy rates dwindle toward single-digits by the end of the year, predicted Todd Doney, a broker with Cushman Realty Corp. The Allianz Insurance Co., Hertz Corp. and UniHealth America are all expected to sign major Tri-Cities occupancy deals early next year, sources noted.

In the western San Fernando Valley, real estate industry sources are wondering how much progress developer Jack Spound will make next year on the future 20th Century Industries headquarters, the first phase of his big Warner Ridge project.

They'll also follow Kilroy/Calabasas Associates' efforts to up the retail element of the planned 1.5 million-square-foot Calabasas Park Centre from 50,000 to 200,000 square feet.

Further north in the Santa Clarita Valley, Riley/Pearlman/Mitchell Co. will also garner no shortage of scrutiny early in the year as it seeks county approval of the 850,000-square-foot, open-air Valencia Marketplace retail center the firm has proposed for an 84.5-acre site just west of the city of Santa Clarita.