Southern California office, industrial markets to improve in 2006.

Expect slow and steady gains in the overall economy to continue to improve office and industrial property fundamentals in 2006 across the Southern California counties of Los Angeles, Orange, Riverside and San Bernardino, according to a study released by the University of Southern California's (USC's) Lusk Center for Real Estate, Los Angeles.

The Lusk Center's 2005 Casden Office and Industrial Market Forecast for Southern California noted that steady job growth has helped to reduce office vacancy rates and raise rents throughout the region.

"Lease renewals reflect the positive outlook of business owners across diverse industries," said Delores Conway, director of the Casden Forecast. "Southern California office and industrial markets will continue to hold their value through 2006, thanks to a flood of capital from mutual funds, REITs [real estate investment trusts] and pension funds needing to diversify real estate holdings and lock in long-term revenue streams."

In Los Angeles County, office vacancy rates dropped substantially throughout the L.A. Basin with the greatest absorption occurring in downtown Los Angeles. Almost all available office space downtown has traded hands since 2001, each time with prices inching upward. Sales of office buildings continued at a record pace, with soaring prices for commercial property, the report noted.

The L.A. County industrial market had the lowest vacancy rate in the United States at 0.8 percent at the end of 2005, and was the largest industrial center in the country with 969 million square feet of space. Rents have risen, but congested freeways, overburdened rail lines, environmental concerns and a shortage of industrial space have all added up to new challenges for the L.A. region. Strong demand for industrial property for sale or lease will continue with soaring prices from a constrained supply.

For the first time in four years, Orange County's Airport area submarket around Newport Beach and Irvine has single-digit vacancy rates of 8 percent, according to the report. This area continued its dominance with the highest rents at $2.66 a square foot--a 12.7 percent annual increase--and the highest net absorption of 1.24 million square feet, which is half of all space leased in the county in 2005.

Companies attracted to lower rents in the North County area surrounding Fullerton helped push its vacancy rates to the lowest levels in the region. South County cities including Dana Point and San Clemente had the highest rents for class-A office space due to an influx of new, higher-priced buildings.

South County industrial developers have capitalized on the market for quality, low-rise residential condominiums converted from obsolete office space. South County showed the highest rents at $0.83 per square foot due to its proximity to the Inland Empire. Total absorption was an impressive 5 million square feet countywide, with most of the demand occurring in the North County, the report noted.

Expect the Inland Empire to continue to be California's fastest-growing urban area over the next 10 years, gaining 10,000 people a year through 2010, the report predicted.

Many companies in recent years have opened new offices or moved to the Inland Empire from Los Angeles, Orange and San Diego counties to accommodate shorter commutes and more affordable housing for employees. The Inland Empire office market remains competitive with rising rents and lower vacancies.

Meanwhile, Riverside and San Bernardino counties comprised the best market in the country for constructing warehouses and new distribution centers. An ever-increasing amount of cargo transported through the region has turned the Inland Empire into a major distribution center.

Large tracts of land and railway, freeway and airport proximity have led to the development of modern warehouse and distribution facilities in the Inland Empire. As the region runs out of empty space, construction of large warehouses is pushing further eastward toward Redlands and Moreno Valley, the report noted.