by Kelly Sims
A practicing Southland appraiser/economist summarizes the past, present and future of California’s dynamic real estate market.
In many areas of California, values in commercial real estate plummeted as
much as 50% during the first half of this decrease. The housing market didn’t
fare much better, as many homes lost 30% of their value. Have we seen the end
or is more of the same in sight? These questions are often asked of real estate
appraisers.
What Happened to Real Estate?
First: Real estate values peaked in the fourth quarter of 1989. Thereafter,
the market went into a tailspin, as values steadily declined. The reasons for
the decline are well chronicled. The end of the cold war and tax reform of passive
investments marked the end of an era of prosperity and growth in real estate.
Second: No one could have guessed that California’s recession would be so
long and pervasive. Vacancy rates in commercial real estate rose as high as
50-60%. Businesses closed their doors or left the state. Land sat vacant. Real
estate ventures went bust. Builders, strapped for cash, were forced out of the
business. And, the RTC became a household name. The foreclosure market set value
limits for the rest of the market. Prices for commercial and residential real
estate could be had for less that the cost to build. New development became
all but extinct, except for finished residential lots and some build-to-suit
industrial buildings in existing business centers.
What About Now?
The steep drop-offs in real estate appear to be behind us. More and more distressed
properties are being absorbed by the market. The RTC is no longer an active
player, dumping properties at sacrifice prices. Vacancy rates in commercial
real estate have begun to drop significantly in Orange and L.A. County, giving
impetus to new construction.
Power retail (supported primarily by only strong anchor tenants) and entertainment
centers are popping up all over Orange and L.A. County, marking a new trend
for commercial developers.
Overall, prices appear to be more stable now than at any time since 1989.
We’re even seeing competitive bidding on homes in the starter and some move-up
markets in various regions in Southern California. Other areas remain sluggish,
especially in the Inland Empire (east of Los Angeles County) which has a land
glut. The most positive sign of a long-awaited recovery is an increase in sales.
Such an increase usually means that buyers believe that prices have hit rock
bottom and/or that some degree of buyer confidence has returned.
Of collateral interest: Homes in Southern California, generally speaking,
are at their 1986 price levels and many condominiums are at their 1973-74 price
levels. Mid-market, move-up single family homes continue to show the strongest
values. Nevertheless, condominiums and entry level homes are beginning to attract
buyers who often pay more rent than they would for home ownership at today’s
bargain basement prices.
What Does the Future Portend?
New residential prices are expected to increase in the near future due to
a very limited supply of finished lots and a corresponding limit in available
alternatives. While it’s still too early to become sanguine about a sustained
and full market recovery, there is cause to be optimistic. Driven by demand,
builders will have to seek new building opportunities by developing raw land.
The building of homes on existing properties currently in land portfolio is
drying up. In each of the prior recessions, home prices following the end of
the recessionary cycle increased dramatically. Look for moderate increases this
next economic cycle.
Kelly Sims is a partner in the real estate appraisal firm of Sims, Trojnar
& Associates. He received his B.A. from Clarement Men’s College in Economics
and has appraised real estate for the last 20 years. Mr. Sims can be reached
at (714) 632-8894.