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| dirty real estate talk: Central valley and inland empire, california |
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By Michael McMullen
2008 was anything but kind to the Inland Empire and Central Valley real estate markets. But what can we expect in both the short-term and long-term? Michael McMullen, Vice President of EnviroFinance Group, LLC, sat down to tell us what’s really going on in the two regions and whether we’ll be seeing a recovery anytime soon.
What is the state of the real estate market in the Central Valley and Inland Empire region?
The word that comes to mind when describing real estate as a whole in the Central Valley is “dire.” Home sales have fallen over 47% since 2006 and a four-year inventory accumulation of unsold single family homes. On the positive side, new housing permits issued in 2008 fell below 2001 levels, indicating that the oversupply will begin to work itself out as credit thaws and foreclosures are absorbed.
The Inland Empire residential market is suffering its own difficulties, with the reverberations reaching into industrial and retail sectors. This region experienced over a decade of rapid construction of large warehouse distribution spaces to store and distribute goods moving through the Port of Los Angeles. Now, with the economy in a recession, the collapse of big name retailers such as Mervyns and Circuit City, and a huge national decline on demand of consumer goods, there are fewer imports and less need for storing and shipping them. The slowing down in manufacturing coupled with the increase of layoffs and bankruptcies, industrial and office buildings are seeing a rise in vacancies. As reported by Reis Inc., a real-estate research firm, office vacancies throughout the Inland Empire rose above 20 percent – the third-highest percentage decline of 76 major metros. For all the current hardships, the Inland Empire industrial market is well positioned for a comeback when the economy improves, perhaps by 2010, because of its low-priced housing, ample workforce and desirable location for international shipping.
Do land values still exist?
It’s pretty obvious that the economy is the ultimate driver behind all things real estate. In both the Central Valley and Inland Empire many institutional investors are picking over the bones of failed transactions whose original developers got caught in a rapidly changing market and are now forced to sell at steeply discounted prices. The desperate need for many sellers to rid themselves of a property to generate immediate liquidity has made land values a guessing game. Lenders no longer can give a standard definitive land value based on region and market conditions. Estimates nowadays move up and down just about as much as the Dow.
Are lending transactions occurring and who can qualify?
Despite a very low volume of transactions, loans are not completely obsolete. This is the time for borrowers with ample experience and a substantial amount of out-of-pocket cash to step-up to the plate. Developers will have to demonstrate that they can carry the majority financing of a project such as having obtain strong tenants, buyers and a viable exit strategy.
Lenders are forcing more of the risk back on developers and/or borrowers. However, debtors who can demonstrate the ability to put more of their own resources at risk on the front end of the deal will have more of an opportunity to close a loan.
But isn’t every market feeling the pinch?
Yes. However, the sectors further from metropolitan cities are getting the worst effects of the downturn.
According to the Labor Department as reported by the Wall Street Journal, the unemployment level rose to 9.5 percent last November in the Riverside-San Bernardino area. A survey conducted by RealtyTrac reported the area’s home foreclosure rates in the third-quarter to be the third-highest of the nation's metros and single-family home prices definitely were not spared from the onslaught with the median single-family home price falling 39.4 percent to $227,200 in the third-quarter compared with $375,100 just one year prior.
However, in the much more densely urbanized Los Angeles County where large tracts of developable land are hard to come by, industrial vacancy is 3.3%, up only 1 percentage point from a year ago. Orange County's vacancy is 5.1%, up from 3.2% last year at this time. So while everyone is feeling the pinch to some extent, the pain is not evenly distributed.
Is there a recovery strategy and how long will it take? Which market may recovery first?
What people are beginning to learn and accept is that recovery will not occur overnight. It will be a long and arduous process that may actually change the face of real estate development. Driven by transportation infrastructure and fuel costs, it may be that urban centers with a focus on infill development will recover faster than others. However, some of the outlying areas may never recapture their past prominence.
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