Future of South Central property goes up in smoke; dozens of commercial and industrial buildings gutted.

Commercial and industrial properties throughout South Central Los Angeles, many of which were already hard hit by a severe local recession and the continuing exodus of major manufacturers, went up in smoke last week -- both literally and figuratively.

Dozens of buildings were gutted by fire, and untold numbers were seriously vandalized, as widespread rioting erupted after four police officers were acquitted of wrongdoing in the beating of motorist Rodney King.

"The impact of this rioting on local real estate is going to make the Bank of America merger (with Security Pacific) look like a cake walk," said David Adams, a local developer with several projects in South Central Los Angeles.

(The BofA merger is expected to seriously soften the downtown L.A. real estate market, as the combined bank vacates huge blocks of office space there.)

"The saddest part of all this is that some of the biggest improvements in South Central have occurred in the past five years," Adams continued. "We were seeing corner after corner developed with little shopping centers. But we saw much of that development burned down last night."

Almost all recent investment in Central Los Angeles has been made by small private investors, sources said. Those investors either built or bought small commercial buildings out of which they ran their private businesses.

But last week's rioting will definitely have a long-term chilling effect on future investments in South Central L.A. real estate, many industry sources agreed.

"There is no question that this (rioting) is going to have a negative impact on industrial properties in the Central L.A. area," confirmed local industrialist Seymour Lehrer, who owns several hundred thousand square feet of industrial space throughout the central city area. "This is the very reason why I chose to (geographically) diversify my holdings -- to reduce my vulnerability to fire, or earthquake, or something of this nature."

Lehrer added that last week's violence is particularly upsetting because financial investment in the central city is more important to long-term economic health than anything else.

"Industry and businesses need to locate to the central urban areas in the worst way," he asserted, "so that our population can work locally, rather than forcing them to commute to work in outlying areas."

The central city industrial market was in decline long before last week's rioting. The vacancy rate for the "downtown/central L.A." industrial market, which contains almost one-third of L.A. County's total inventory of industrial space, was only 8.8 percent a year ago. But that vacancy rate now stands at 12.5 percent. That increased vacancy rate was caused by "big-box" users migrating eastward to lower-priced areas in the east San Gabriel Valley and Inland Empire, and by other industrial users moving into low-priced South Bay buildings vacated by defense-related companies.

Most commercial and industrial buildings in South Central Los Angeles are now occupied by businesses that employ large numbers of low-wage, unskilled workers, sources said. Most of those workers live in the surrounding neighborhoods and commute very short distances to their jobs.

Many property owners are garment manufacturers and distributors, who relocated to the lower-priced area from the higher-priced garment district east of downtown L.A.

Many others are Asian immigrants with a strong cultural preference for owning property, as opposed to leasing.

Those Asian immigrant property owners, especially the Koreans, were feeling particularly at risk last week, sources said. Many of the Korean property owners were said to be fearing reprisals from black rioters who might seek revenge for a recent court ruling. That ruling involved a Korean grocer being sentenced to probation for shooting a black girl who was suspected of shoplifting.

Businesses that are leasing commercial and industrial buildings in South Central L.A. might also feel trapped because they cannot get out of long-term leases and won't be able to find anyone willing to sublease their space.

Meanwhile, few institutional investors own commercial/industrial property in South Central L.A., sources said, because the property is not investment grade, and because it can't be easily bundled into large portfolios. Since almost all buildings are individually owned by small investors, bundling properties into portfolios is virtually impossible. Hence, institutional investors typically do not buy small, individual buildings because such holdings are too costly to manage. Larger portfolios, on the other hand, provide the critical mass needed to provide cost-efficient management.

Industrial properties expected to suffer the worst drops in value are those situated in "mixed-use" areas.

"Anywhere you have a small industrial factory next to a retail shop, next to a church, next to a body-and-fender shop, that's where you're going to be hurt the worst," Lehrer said.

Unfortunately, almost the entire South Central L.A. marketplace fits that exact description.

"This (South Central L.A.) area is a very hard sell to begin with due to tenants' grave security-related concerns," explained John Kolich, a leasing agent for Daum Commercial Industrial Real Estate. "Now the difficulty of selling down here is going to be tripled. It might be insurmountable."

While last week's rioting could likely devastate scores of small property owners in South Central L.A., it could actually help large, homogenous industrial parks in nearby areas, such as Torrance, Commerce and Santa Fe Springs, sources said.

"These large industrial parks are built with a limited number of entrances, so you don't have people driving through them that don't belong there," said Michael Rosenfeld, a spokesman for Watson Land Co., which owns several large industrial parks in the area. "Also, these industrial buildings don't have lots of windows or doors that can be easily broken into."

The central city industrial submarket has actually be in decline for at least the past two years, sources said. Rental rates there have declined between 10 and 15 percent during that time.

Industrial tenants typically pay on a "triple net" basis, meaning they must pay for their own structural maintenance, taxes, and insurance. Hence, just the increased insurance costs could be enough to drive some tenants out of business.