Los Angeles – Sept. 7, 2016 – Los Angeles is likely to be one of the more resilient office markets during the next recession in part due to its increased diversification of its employment base and subdued new construction, while markets such as Boston, New York and Washington, DC are likely to be most affected, according to the latest research by CBRE Group, Inc.
In a “deep recession” scenario, a one-time 1.0 percent negative shock to employment growth, with both market sensitivity and current rent and vacancy conditions factored in, could lead in Boston to a temporary drop in rent growth of as much as 2.6 percent and a temporary vacancy rate increase of 515 basis points. In San Francisco, rent growth could slump by 3.4 percent and vacancies could jump 905 basis points, according to data from CBRE Econometrics Advisors. That compares with a zero percent rent drop and a 123 basis point increase in vacancy rates in Los Angeles under such a scenario, according to the data.
Investors in U.S. commercial real estate are wondering what this next recession will mean for commercial real estate performance. The effects of a deep recession on a market are related to three key factors, according to the report. They include the sensitivity of the area’s rents and vacancy to changes in its employment growth rate, current level of rents and vacancies in a market -- which determine its risk of negative adjustments -- and a market’s future employment growth.
“The Los Angeles economy is much different today than it was during the previous peak,” said Petra Durnin, head of research and analysis for CBRE Southern California. “Sectors that are much less cyclical, now represent much larger shares of total employment compared with previous decades.”
Cyclical sectors, such as manufacturing, finance, and construction, are playing a smaller part in Los Angeles’ employment base, while education and healthcare as well as leisure and hospitality have gained ground, she added.
Health & education services have increased to more than 16 percent of total current office employment from about 13 percent during the prior peak, according to a CBRE report. Leisure and hospitality employment jumped to 12 percent from less than 10 percent.
“So, fewer jobs shed means less vacancy disruption and less price depreciation, both positives for investors and developers,” she added.
Differences among markets and the factors that drive them are a crucial consideration in preparing investment portfolios for recessions, and in identifying investment opportunities when growth returns. The CBRE research modeled the effects of a major 2008-type recession on the 10 largest U.S. office markets, analyzing how rents and vacancy in each would respond to severe drops in employment. For the full report, click here.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
