Category Archives: Property

Economy Property

Real Estate Market Outlook-Fall 2012

Published by:

By Alfred Gobar
Chairman, Alfred Gobar Associates

Over the past 50 years, increase in nonagricultural wage and salary employment as reported by public agencies has correlated closely with household formation and, therefore, housing occupancy. Employment growth is a good thing for real estate markets. An index of nonagricultural wage and salary employment for Southern California as a whole (Ventura, Los Angeles, Orange, Riverside, San Bernardino, and San Diego Counties) is illustrated in Exhibit A in comparison with a similar index based on the 1990 recession. As indicated, employment declined more in percentage terms in the current recession than it did two decades ago, and the recovery has been relatively feeble. Those of us interested in the High Desert real estate market, therefore, should have patience in order to identify attractive real estate market opportunities. From August 2007 until August 2009 (about the bottom of the decline in nonagricultural wage and salary employment), total job base in the six-County Southern California area decreased by about 800,000 jobs. Recovery since August 2009 through August 2012 has amounted to almost 200,000 jobs. Currently, therefore, the total employment base is about 600,000 jobs below the peak prior to the onset of the current recession. Theoretically this amounts to an improvement in demand from the low point of the cycle on the order of 135,000 dwelling units. Concurrently, however, despite modest new construction, approximately 140,000 new units have been added or are in the pipeline to be added to the total housing stock in Southern California; i.e., new development is at about the rate of demand growth.

Real Estate Outlook-Exhibit A

There may be a light at the end of the tunnel. It is likely, however, that we are looking into a fairly long tunnel.

During the twelve months ended August 2012, nonagricultural wage and salary employment as reported by the California Employment Development Department for the six-county area grew by approximately 158,000 jobs. This is a significant increase. Employment trends for California recently have been outperforming the general trends for the U.S. overall.

Employment growth over the twelve months ended August 2012 shows increases in most sectors including construction. Of significant interest is the increase in employment in the finance sector amounting to 9.2 percent of the overall job growth. Within that category, employment in real estate-related activities—rental and leasing, etc.—amounted to 4.9 percent of the 158,000 jobs increase. The finance sector represents less than 6.0 percent of Southern California’s employment base. The real estate portion of the finance sector amounts to about 2.0 percent of the total base. These categories of employment, therefore, are growing substantially faster than the general economy and faster than their overall role in the economy.

Employment in leisure and hospitality accounted for a substantial portion of job growth during the twelve months ended August 2012, amounting to 23.3 percent of the increase. This sector accounts for less than 12.0 percent of the total employment base in the six-county area.

Government employment grew little during the most recent twelve months for which data are available, accounting for 2.2 percent of the net increase. Overall, government employment is about 15.0 percent of the total employment base in Southern California. If government employment were to be increasing consistent with the other categories, total increase in nonagricultural wage and salary employment over the twelve-month interval would have been above the long-term average for Southern California as a whole and job growth would have exceeded the long-term average trend.

When Harry Truman was President, he was said to have pushed for “one-handed economists” so that economists could avoid tempering their projections by saying “on the other hand.” Similarly, we should point out that for the past several years, employment estimates from government agencies have been subject to revision and to rather erratic behavior on a month-to-month basis contributing to some queasiness regarding the validity of the data. Since the recent employment figures have been so positive, however, until they are revised, we will continue to act like we fully trust their validity. In the most recent twelve-month data, the most significant growth in nonagricultural wage and salary employment occurred in Los Angeles County, followed by San Diego County, Orange County, and the Inland Empire, in that order. The level of nonagricultural wage and salary employment in Ventura County declined slightly during the twelve-month interval.

The pattern of housing development in Southern California derivative of building permit activity for 2011 is fairly consistent with the relative growth in nonagricultural wage and salary employment among the five study areas (Riverside and San Bernardino Counties are grouped together as the “Inland Empire”). A comparison of the percent of nonagricultural wage and salary employment growth accounted for by each of the five areas relative to the percent of new units authorized by permit in each of the five areas is shown below:

Real Estate Outlook-County Comparison Chart

The specific data indicate that San Bernardino County represented 5.9 percent of the new units authorized during 2011 and Riverside County for 13.3 percent. Riverside County’s housing market benefits from its proximity to San Diego County, which experienced the recession sooner than the rest of Southern California and has been doing somewhat better than much of the rest of Southern California. In addition, Riverside County serves a national market for second homes and retirees.

The trend of building permit activity for residential development in Southern California since 1985 is illustrated in Exhibit B.

Real Estate Outlook-Exhibit B

There has been a modest increase in residential building permit activity since 2009. Actual numbers of new units authorized by permit since 1985 for Southern California overall are summarized in Exhibit C. Projections for full-year 2012 suggest building permit activity for Southern California will total about 29,000 units. Interestingly, this is roughly 14.0 percent of the level of building permit activity observed in 1986 when Southern California was emerging from the 1980 recession. It is also interesting to note that during 1985—at the end of the 1980’s recession—building permit activity in Southern California totaled nearly 150,000 new units, while currently in 2012, approximately three years after the bottom of the current recession, building permit activity is only 20.0 percent of that level at about 30,000 units a year.

Real Estate Outlook-Exhibit C

Although the 1980’s recession had the special features of extraordinarily high inflation and interest rates, the recovery from the current recession has been minimal, suggesting that economic growth that occurred during the 1980s supported a strengthening housing and real estate market, while the tepid economic growth observed currently has obviously not resulted in similar real estate sector activity.

Exhibit D shows the pattern of residential building permit activity on the High Desert. At the peak of activity, more than 8,000 units a year were being authorized by permit. Recently, as shown in Exhibit E, overall residential building permit activity has been on the order of less than 250 units per year in 2011 and likely to be substantially less than 1,000 new units for 2012.

The figures in Exhibit E are influenced substantially by 205 multi-family units authorized by permit in Victorville. Absent this atypical level of activity in multi-family housing construction, overall building permit activity on the High Desert would probably be on the order of 350 units for the full year, or less than 4.0 percent of the more than 8,000 new units authorized in 2005.

Real Estate Outlook-Exhibit E

Based on the average building permit value per unit, much of the new construction of single-family housing on the High Desert recently has apparently been custom homes. This is not a product that lends itself to high-volume activity. Much of the real estate activity observed recently has been of a qualitative nature—purchase of distressed assets that lend themselves to be reworked for enhanced value. The whole process of flipping foreclosures has attracted increasing levels of interest on the part of real estate professionals who have limited opportunities in tract developments, land entitlement, or other large-scale endeavors which typify opportunities in a strong market. Although interest rates are at record lows—a factor which should encourage real estate development or real estate investment—uncertainty associated with the tax environment, the risk of a double-dip recession, and general unease about an uncertain fiscal policy in light of the potentially inflationary impact of the current monetary policy contribute to anaura of uncertainty that makes real estate decisions particularly difficult, even for those intrepid individuals who somehow chose to make their living in this field.

One thing that makes this recession different from previous ones is that heretofore we generally relied on the housing market to lead the country into an economic recovery. Because of efforts through the Community Reinvestment Act and encouragement of Fanny Mae and Freddie Mac, we induced marginal buyers into real estate ownership prior to the recession. The reservoir of pent-up demand represented by potential first-time homebuyers was severely eroded and is not readily available to stimulate an economic recovery associated with lower interest rates and more moderate-priced housing. Significant portions of the housing market(which is the largest proportion of the real estate market) have been overexploited because of the interference of government policy, making this recession atypical relative to past experience. Basically, we have already shot that arrow and no longer have it in our quiver. This implies that the recovery is likely to continue to be slow, and that the real estate market will not begin to be vibrant for quite some time. Opportunities, therefore, will continue to be in rearranging real estate assets better to conform to the demand profile or exploiting market imperfections associated with limited understanding of the characteristics of demand and supply for real estate product. Raw demand is not likely to drive a strong real estate market for a number of years.

Economy Property

Some Encouraging Signs on the Home Front

Published by:

By Carlos Rodriguez
Chief Executive Officer
Building Industry Association (BIA) Baldy View Chapter

After years of cautious optimism, home building professionals are beginning to see signs of improvement in Southern California’s housing markets. While there is still a long road to a full recovery, the good news is Southern California home sales rose to their highest level in six years while prices hit a four-year high in August.

Data Quick reports that the number of homes sold increased more than 14 percent in August to more than 22,000 compared to the same period last year. The median price for new and existing houses and condos in the six-county region rose nearly 11 percent to $309,000 last month compared to August 2011. Last month’s median price was the highest since the median was $330,000 in August 2008. Experts say the housing market is fueled by low mortgage rates, more mid- to high-end deals, and near-record levels of investor and cash buying. Likewise, prices have been lifted partly by fewer sales of foreclosed homes.

Locally, communities located within the Victor Valley market have also experienced an estimated 4% increase in the median home pricing between July 2011 and July 2012 from approximately $112,400 to $117,100. If these figures continue to improve in the fourth quarter of this year and throughout 2013, then that’s great news for the outlook for a potential economic recovery.

The simple fact remains that an improved housing market will lead us out of economic recession. According to the report The Economic Benefits of Housing in California prepared by the Strategic Economic Research Center, in 2010 new home construction contributed over $13.8 billion per year and supported nearly 77,000 jobs in California in 2010. Over one-half of the economic output (about $7.8 billion) was directly the result of new housing construction and another $6.1 billion was generated by those sectors which supply goods and services to the residential construction industry “as well as the spending activities of the employees of the construction industry and its supplier sectors.”

The report went on to say that every dollar spent on new housing construction in California generated 80 cents in total economic activity while each job created through residential construction supported an additional 1.2 jobs in related businesses.

Because new homes have an assured longer life, appraisals are generally higher than on comparable resale homes and new homes are more likely to sell for a comparatively higher value in the future. This results in enhanced property tax revenue streams for our cities and county. That’s also good news for local and county government in desperate need of funding for quality of life services.

New home construction also funds new infrastructure such as streets, schools, parks, libraries along with fees for public safety such as police and fire services. These investments benefit everyone by keeping us safe and increasing the property values of existing homes and businesses surrounding new home communities.

There’s still a long road ahead to a full economic recovery. However, the recent signs of improvement in the housing market provide us with encouraging news about the prospects of increased local job creation and enhancements to local infrastructure improvements. While the market is still on the mend, the Building Industry Association Baldy View Chapter will remain steadfast in our efforts to work with elected leaders at every level of government to find public policy solutions to help us back on the pathway to prosperity.

The Building Industry Association of Southern California, is a non-profit regional trade association that represents more than 1,000 member companies within a six county region. Together, BIA members build most of the homes and communities throughout the same six-county region. For more information about the Baldy View Chapter go to

Economy Property

The Expansion of the Panama Canal Will Not Have a Negative Effect on the Demand for Industrial Space in Southern California

Published by:

By Ronald J. Barbieri, Ph.D., CPA
The Bradco Companies

The completion of a third set of locks in the Panama Canal by 2015 will enable container vessels capable of carrying up to 12,000TEU’s of containers to pass through the canal and deliver goods from China and other countries in the Far East directly to eastern half of the United States via East and Gulf coast ports. The conventional wisdom is that this will substantially reduce the flow of in-bound containers through the Ports of Los Angeles and Long Beach. An article titled: “Panama Canal: Myths and Misconceptions” that appeared in the May 2012 issue of the American Shipper argues that the opening of the third set of locks in the Panama Canal will only have a minimal impact on the volume of imports entering through the twin Southern California ports.

This conclusion is based on the following observations discussed in depth in the article: First, there are few, non-bulk products that are not shipped by containers; so there is little growth from the conversion of loose cargo to containers. Second,the amount of outsourcing by U.S. manufacturers has already been maximized to the greatest extent possible. The relocation of manufacturing from Canada and Mexico to China was mostly completed during the last decade; and there are an increasing number of companies that have begun to relocated production back to Mexico and the United States, because of issues related to cost, quality control and time-to-market. The article claims analysts are now predicting slow growth and more trade volatility with competition among ports for container throughput becoming a zero sum game of winners and losers. A third point made in the article that shippers will not realize any significant cost savings due to the shipping of goods through the Panama Canal because the tolls chargedby the canal will offset much of the cost savings of using the larger container vessels. Also the West Coast carriers, ports and railroads have the advantage of being able to differentiate pricing by market segment and could lower prices for less premium service with slower transit times if they feel pressure from the all-water service going through the Panama Canal.

Fourth, the all water service via the canal,though less expensive,can be one to two weeks slowerthat transcontinental intermodal transport. High-value or perishable products that must quickly get to market will continue to rely on the faster transit times available through the West Coast corridor. Finally, the article also notes that by 2015 only the four ports of Norfolk, New York-New Jersey, Baltimore and Miami will have the 50-foot deep channels and berths capable of handling the largest vessels. While many of the ports are competing for federal and state funds to dredge channels and increase railroad capacity most will have a difficult time securing adequate funds because they will not have the shipping volumes to justify the required infrastructure investment. Whereas, the West Coast ports already have the infrastructure in place, and have the container volumes to justify adding additional infrastructure.

The articles concludes that the ports of Los Angeles and Long Beach could lose up to 10% of their volume to East Coast ports serving the Ohio River Valley or gain a few percentage points in market share depending on how shippers respond to the expansion of the Panama Canal. What is apparent from reading the article is that there are a number of offsetting factors that make it difficult to determine with precision the level of impact the expansion of thePanama Canal will have on the twin ports of Los Angeles and Long Beach. Nevertheless, the article, which is on The Bradco Companies website, makes a convincing case that the decline in the level of imports handled through the twin Southern California ports, is not likely to be much greater than 10%.

Even if the Ports of Los Angeles and Long Beach were to experience a 10% decline in volume because of the expansion of the Panama Canal it is not likely that such a decline in container volume would have any significant negative impact on the demand for industrial warehousing space in Southern California for following three reasons.

First, approximately 2/3 of the inbound containers that are handled by the Southern California ports are loaded on trains or trucks and are transported to the east. The containers placed on trains are hauled more than 1,200 miles because that is the distance at which the cost of shipping by train before transferring the containers to trucks become less than the cost of loading the containers directly on trucks and hauling them to their final destination. Even if the containers transported by trains experience some reduction in traffic it would not impact the demand for industrial space in Southern California.

Second, the expansion of the Panama Canal will not have any impact on the containers that are hauled east by truck because it would not make any economic sense to ship the containers to Texas and then backhaul them west to their destination points that are within 1,200 miles of Los Angeles. Containers transported from the ports to the east by truck do not create any demand for warehousing space in Southern California; nevertheless, they are one of the factors motivating the Los Angeles Metropolitan Transit Authority to get the E220 Freeway from the City of Palmdale, CA to the I-15 freeway in the City of Victorville, CA completed ASAP. The construction of the E220 is by far the least expensive solution to get trucks from the ports of Long Beach and Los Angeles to the I-15 Freeway heading east. The E220 is also expected to relieve congestion on I-10, I-210, I-15 and the 60 Freeways in the Los Angeles Basin and therefore mitigate several environmental and congestion problems.

One third of the inbound containers at the ports of Los Angeles and Long Beach are transported by truck from the ports to industrial firms in the Los Angeles Basin for local distribution, inventory storage, or for use in manufacturing. None of these will be impacted by the addition of a third set of locks in the Panama Canal.

The high levels of Net Absorption in the Inland Empire by large industrial users and tenants is further confirmation that Southern California role as a warehousing, distribution and manufacturing center will not be negatively impacted by the expansion of the Panama Canal.

Economy Property

A Shortage of Homes for Sale Has Caused a Significant Increase in the Price of Homes in the High Desert

Published by:

By Bob Thompson & Ronald J. Barbieri, Ph.D., CPA 
The Bradco Companies

During the 2004 -2005 housing bubble, 600 new homes were sold each month in the Victor Valley area in addition to 500 previously owned homes. The vacancy level was low and builders were straining to meet demand, which was artificiality inflated by the lax lending standards fostered by the federal government through Freddie Mac and Fanny Mae. The median price for previously owned single family homes in the Victor Valley area peaked in February 2006 at $322,000. By April 2009 the median price had declined approximately 68% to $103,000, which was the low point for this real estate cycle. In March 2012 the Median price for the area was only $110,000; however prices have increased consistently since May of this year. By September 2012 the median price reached $121,000. The table below titled the Victor Valley SFR Market Condition Report for September 2012 was prepared by Bob Thompson for Escrow Junction. It is the information source for this article.

A Shortage of Homes for Sale-Table 1


In the last six months the financial institutions including Freddie Mac and Fanny Mae have further reduced the number of home they release for sale. The number of homes listed has declined from a 2.2-month supply last March to only 1.4 months today. There were 641 homes available for sale in September 2012 compared to 451 closings. During 2004 and 2005 the number of outstanding listings averaged 2,500, which represented four to five months of sales. Real estate agents believe this is one of the factors causing the rise in home prices over the last few months.

Also, a review of the second page of the Market Condition Report would reveal that only 77 REO properties were listed for sale at the end of September, which is less than the 209 units available at the end of March. There were only 97 “short sale” units available in September compared to 230 in March of 2012. On the other hand in the latest report there were 469 “Standard Sale” homes listed by non-financial institutions which was essentially the same number available last March. In case of REO sales the ratio of closings to listing as only 0.50 months. There is truly a shortage of REO listings. The inventory for Short Sale properties that could be sold in 1.1 months at the current rate of sales, while the ratio of supply to demand was 2.2 months for Standard Sales.

A Shortage of Homes for Sale-Table 3


A Shortage of Homes for Sale-Table 4


A Shortage of Homes for Sale-Table 5

REO and Short Sales accounted for 53% of the transactions in September 2012. This is down from 67% in March of this year and 74% from 18 months earlier. This is a positive trend because it indicates properties that were foreclosed on represent a declining portion of the sales activity. Many of the buyers were investors, rather than owner occupants, who renovate the homes, and either, resell the units, or lease them to renters who are not able to purchase a home.

The demand for single family homes continues to be artificially inflated, because of the policies of the federal government. Interest rates are extremely low and down payments are usually substantially below 20% of the purchase price for owner occupants. Individuals are purchasing homes in the High Desert with as little as 3% down. On the other hand the underwriting criteria and documentation requirements are far more rigorous and extensive than normal; and the requirements for home appraisals tend to place a downward pressure on home prices. In the past appraisals could only include REO sales comps which are lower than standard sales comps. The effect of all this is to make home prices in the High Desert the most affordable in Southern California.

The requirement to use REO sales when doing an appraisal has been recently waived, which will make it easier for home price to increase. This will be the case, not only for the High Desert but for all of Southern California. The second page of the Market Condition Report depicts the Median Close Price for the 11 residential submarkets in the Victor Valley Area. In September of this year the Median Close Price for the REO sales in the area was $108,000. This compares to a Median Close Price of $116,000 for Short Sales and $130,000 for Standard Sales.

Home prices are expected to continue trending upward if the U.S. and California economies continue to expand, creating jobs that could support population growth and substantial household formations in both the High Desert and the Inland Empire. The good news is that the population of the High Desert increased since the U.S. Census and is currently slightly higher than it was at the beginning of 2009, before there was an out migration caused by the last recession. Recent population trends are discussed in another article on population in this Bradco High Desert Report.

Politics Property

The County of San Bernardino is Moving Forward with Major Construction Projects

Published by:

By Brad Mitzefelt
Vice Chairman & First District Supervisor
San Bernardino County Board of Supervisors

As I’m completing my service as San Bernardino County’s First District Supervisor in December, I’m pleased to take this opportunity to update readers of the High Desert Report on just a few of the county’s many ongoing and recently accomplished initiatives.

First and foremost, the ability of local government to provide public services is correlated to the success, or lack thereof, of local businesses. While I have recently successfully pushed for reforms to our development code and permit processing to encourage economic activity, my successor will have much to work on to build on this progress. In addition to whether an area is open for business, there are several other factors considered by a business making a decision about where to locate, including infrastructure and quality of life, especially related to public safety and public and private amenities.

Infrastructure is perhaps the most visible. For example, it’s impossible to miss the rapid construction of the La Mesa/Nisqualli interchange on Interstate 15, due to be complete next year. It was a true team effort by High Desert representatives to SANBAG, and I was proud to have been President of SANBAG when we agreed to partner with the City of Victorville in constructing this critical bypass to Bear Valley Road.

Strategic flood control improvements, including two that help advance development of a critical east-west corridor, from the Yucca Loma Bridge in Apple Valley to the Nisqualli Interchange in Victorville, to more traditional projects like a new storm drain at Mountain View Acres in the Victorville area are just a few examples of the county and cities working together to solve longstanding problems. Mountain and desert communities worked together to bring more than $28 million in additional road funding from state sources over the past few years, not including tens of millions of state bond dollars secured for Nisqualli and the new Ranchero interchange in Hesperia, and a hundred million dollars for the soon-to-be-reconstructed Devore Interchange at the I-15/I-215 junction that will eliminate the evening and weekend backup there.

A longer-term project that deserves special attention is the High Desert Corridor, which will link Palmdale and Victorville through a Public-Private Partnership that will speed up construction by 20 years. It will be the most powerful job-creating machine the High Desert has ever seen, ranging from blue-collar logistics jobs to highly skilled manufacturing to high-tech research and development. I was proud to be the founding chairman of the joint powers authority between the two counties that has since expanded the environmental analysis to include a rail component. This is our ticket to Metrolink commuter rail service to the High Desert, and potentially even a Palmdale to Victorville leg of the XpressWest private high-speed rail to Las Vegas project.

On October 1, the Board of Supervisors supported my motion to approve the Cadiz Valley water project, 15 years in the making, that will make available more than 200,000 acre-feet of water to water agencies within San Bernardino County over a 50-year period after it’s constructed in a few years. This will provide hundreds of millions of dollars of investment in our county and thousands of jobs, without harming the environment in the remote desert watershed near Amboy.

Public safety is always the top priority of local government, and nearly tripling the capacity of the Adelanto jail from 760 beds to 2,152 beds will allow the county to better deal with state prison realignment, which is putting thousandsof additional convicts and parolees under County jurisdiction. This improvement is currently under construction.

Outstanding public safety services require modern facilities. We’ve built new fire stations in Hesperia and Phelan, and the County’s new High Desert Government Center in Hesperia will soon be home to a state-of-the-art Public Safety Operations Center that will house dispatch for sheriff and fire and will serve as an emergency operations center. The County recently approved plans for a new fire station at Spring Valley Lake, which should be completed by fall 2013.

Public safety is one aspect of the important services provided by county government. Educational, cultural and recreational facilities also define the character of a region. The Victor Valley Museum in Apple Valley reopened last year as a fully accredited branch of our exceptional county museum system. It is truly an important cultural and historical touchstone for the High Desert.

It was quite an undertaking to acquire this previously private museum and bring it into the county system. However, I am now concerned with its future. So I am helping start the Friends of the Victor Valley Museum to raise private support to keep the museum open and thriving. I have pledged matching funds to a fundraising kickoff event on November 8 from 6 p.m. to 8 p.m. at the museum.

The County continues to support development of the Mojave River Walk trail which will join downtown Victorville with Mojave Narrows Regional Park and beyond. Victorville is the lead agency and my office was able to provide $75,000 as matching funds for a grant that allowed the environmental review by Victorville to continue uninterrupted. And early next year, Wrightwood will have a new skate park, providing young people with a safeplace to enjoy their favorite pastime.

The most popular and internationally recognized attraction in the nine-park county regional park system is undergoing major improvements. Calico Ghost Town just opened the new Calico Mining Museum in the previously unused Zenda Building, providing an entertaining and informative window into the past lives of the miners and the historic mining equipment and techniques that made Calico one of the most productive mining districts in the late 19th and early 20th centuries. The Lane House at Calico is also being refurbished with new exhibits, and the County recently awarded a contract to construct new restrooms and showers at the campground that serves as a popular staging spot for off-road trail adventures.

As we continue to look to the future, we want to ensure that growth and development down the road has necessary infrastructure and public amenities to ensure a great quality of life. The community of Helendale in the not-too-distant future will be an even more ideal location for the highly skilled workers and managers the region is beginning to attract. When a number of proposals emerged several years ago to build hundreds of new homes there, I called for and have since funded development of a Helendale specific plan, which is analyzing and planning for the community-wide need for roads, water, parks, and other infrastructure. The specific plan will guarantee that Helendale will live up to its potential.

To address the county’s past corruption and prevent future continued ethical issues, we have prosecuted and pursued wrongdoers for punishment and restitution. We are recovering millions of dollars lost to corruption and we have passed numerous reforms. We have made county government more transparent and put a cap on campaign contributions to county elected officials. Our citizens demand clean government and our good name depends on it.

I was proud to have helped usher in entirely new management that includes a world-class, respected and empowered County Executive Officer, who has helped us get our financial house in order over the past few years, identifying and eliminating myriad deficiencies and bringing order and professionalism to a government that was at times dysfunctional, sometimes unable or unwilling to do more than follow the whims of elected officials.

Like any family or business, the County is obligated to live within its means and serve as vigilant stewards of your tax dollars. The decline in property values and taxable sales have hammered County government on the revenue side, but generous pensions for our public employees that were negotiated and awarded during boom times threaten to overwhelm our ability to provide essential public services.

Employee associations are recognizing the gravity of the long-term situation and have been partners in reaching solutions. Top administrative staff started paying the 7 percent employee share of their pension deductions more than a year ago and fire department employees followed suit. More recently our deputy sheriffs and probation officers joined them in being part of the solution as well. The next challenge will come when the contract with the general employees comes up for negotiation in 2014. Labor costs are the bulk of local government expenditures so we will have an opportunity to make adjustments that will put the county on solid financial footing for years to come.

But government is a lagging indicator and the financial health, and as I said before, of local government depends on the success of the private sector. The High Desert needs to work as a region to attract employers. I have made key investments on your behalf in education of our workforce, from aviation mechanics training to nurse training to precision machinists training. But there is much more to do to replicate these efforts and leverage training programs and dollars across all major industries.

Our selling points are compelling – location, land, labor, and leadership. But we need to realize that whether a business comes to Adelanto or whether it comes to Apple Valley, we all benefit. To that end, I am supporting the creation of Team High Desert, a cooperative effort among the four Victor Valley cities to market the region to site locators.

I see High Desert governments working together better than they did when I began my public service with the county. This is helping us solve regional problems, which is always a huge challenge. I consider that one of the most important things I have had a hand in. It has been an honor to serve, and I thank you for the opportunity.


All the Industrial Markets in Southern California Experienced Substantial Absorption in Recent Years

Published by:

By Ronald J. Barbieri, Ph.D., CPA
The Bradco Companies

A substantial portion of the absorption of industrial space in the Inland Empire during the last decade has been the result of firms migrating from Los Angeles and Orange County, where land is expensive and scarce, to the Inland Empire where there are sites large enough to accommodate the high ceiling warehousing and manufacturing facilities. A critical question is whether or not the space vacated by firms migrating to the Inland Empire had been leased to other firms; if not, the vacancy levels for industrial space in the coastal counties would continue to increase, portending an eventual slowdown in the demand for industrial space in the Inland Empire. Conversely, if other firms were leasing the industrial space vacated along the coast, it would suggest the demand for industrial space in Inland Empire would continue to expand, possibly at an accelerating rate.

CoStar classifies industrial space into two categories: Industrial Warehousing Space and Flex Space. As of the end of the 1st Quarter 2012, there were 203 million SF of Industrial Flex space in Southern California and 1,811 million SF of Industrial Warehousing space. By the end of 2011 89.9% of the total stock of industrial space was classified as Industrial Warehouse space, which is the subject of this article.

All the Industrial Markets-Graph 1

The above graph depicts the stock of Industrial Warehouse space in Southern California by county from the end of 2000 through the 1st Quarter 2012. The inventory in Southern California increased from 1,542 million SF to 1,811 million SF. A total of 269 million SF of Rentable Building Area (RBA) were delivered in six county regions to accommodate the needs of warehousing and distribution firms as well as manufacturing companies. On average 23.9 million SF of space were delivered each year.

The inventory of Warehousing Industrial space in the Inland Empire increased from 298 to 482 million SF over the same 11.25 year period. As of the end of the 1st Quarter 2012, the Inland Empire accounted for 26.6% of the total inventory of Warehousing Industrial space in Southern California. Approximately 184 million SF were added to the stock, which represents an average increase of 16.4 million SF per year. It also represents 69.7% of the total industrial warehouse construction in Southern California. San Diego County had 145 million SF as of the end of the study period, up from 130 million SF as of the end of 2000. This represented an increase of 15 million SF or approximately 1.3 million SF in deliveries per year, which was 5.7% of the total deliveries. San Diego accounted for 8.0% of the Warehousing Industrial RBA in Southern California as of the end of the 1st Quarter 2012.

The inventory of industrial space in Orange County increased from 229 to 237 million SF over the 11.25 year period. Orange County housed 13.1% of the RBA of Southern California by the end of the March 2012. The addition of 8 million SF represented an increase of 700,000 per year. Orange County only accounted for 3.0% of the net additions to the stock of Warehousing Industrial space in Southern California, which was the lowest of all the counties. Los Angeles and Ventura Counties are reported together by CoStar. There was 947 million SF of space in both counties as of March 31, 2012.This represented 52.3% of the Total RBA in the Southern California Region. In December 2000, there was 890 million SF of Industrial Warehouse space. The inventory increased by 57 million SF or 5.1 million SF per year. Los Angeles and Ventura Counties accounted for 21.6% of the increase in building inventory over the study period.

The table below depicts the annual Net Absorption of Industrial Warehouse Space in Southern California by county for the period beginning in 2000 through the 1st quarter 2012. During the first 8 years of this millennium, 248 million SF of Industrial Warehouse Space was as absorbed in Southern California. This represents an annual net absorption of 31 million SF. The region experienced a Negative Net Absorption of (4.9) million SF in 2008 and (15.9) million SF in 2009 due to the Great Recession. In 2010 the absorption turned positive by 10.0 million SF; and in 2011 Southern California absorbed 21.0 million SF.Approximately 3.2 million square feet of the net absorption occurred in Los Angeles, Ventura, San Diego and Orange Counties. In the 1st quarter of 2012 demand increase by 4.0 million SF, which on an annual basis is equivalent to a Net Absorption of 16 million SF. This suggests the industrial absorption in the Inland Empire is likely to remain high and possibly even accelerate.

From 2000 and the first quarter of 2012, the Inland Empire accounted for almost 77% of the net absorption of Warehousing and Industrial space in Southern California. For the 8-year period ending in 2008 Riverside and San Bernardino Counties absorbed 153 million SF or approximately 19.1 million SF per year. In 2008 the Inland Empire absorbed 4.5 million SF, before losing 200,000 SF of industrial demand in 2009. Thereafter, the demand for industrial space rebounded with 11.6 million SF being absorbed in 2010 and an additional 17.8 million SF being occupied in 2011, Los Angeles and Ventura Counties experienced the second largest increase in demand in Southern California. During the first 8 years of this millennium they absorbed 70 million SF of Industrial Warehouse space. The two counties suffered an 18 million SF decline in occupancy during the three years ending in 2010, before gaining 900,000 Sf in 2011 and 1.6 million SF in the first quarter of 2012.

All the Industrial Markets-Graph 2

Orange County absorbed 9.9 million SF during the period 2000 through 2007; but suffered a negative net absorption of (5.3) million SF for the three years ending in 2010. The momentum shifted to a positive net absorption of 1.6 million SF in 2011 followed by 500,000 SF in the first quarter of 2012. Beginning in 2011, the Southern California industrial market has experienced a substantial increase in net absorption.

The vacancy rates are summarized by the county for the years 2000 through the first quarter 2012 in the table below. The vacancy rates were extremely low at the start of the millennium. The vacancy rate for all of Southern California for the year 2000 was 4.0%. With the exception of San Diego County, the vacancy rates for the other submarkets increased slightly in 2001 and 2002 before declining during from 2003 through 2005. With the exception of the Inland Empire the vacancy rates remained low until the effects of the recession began to be manifested in 2008. In 2009 vacancy rates for Southern California peaked at 7.3% and at 12.1% for the Inland Empire.

All the Industrial Markets-Graph 3

Vacancy rates eased somewhat in 2010; but they dropped significantly beginning in 2011. By the end of the first quarter of 2012, the vacancy rates for Southern California declined to 5.7%. At that point in time the vacancy rates for the Inland Empire had reached 6.8%. Equilibrium vacancy rate for all of Southern California appears to be about 4.5%; for the Inland Empire it is approximately 5.5%. Rents for the large box industrial space appears to have stabilized in the beginning of 2011 before increasing in latter part of that year and into 2012.

Because there has been little new construction along the coast coupled with the substantial increase in the demand for industrial space, the vacancy level has significantly decreased in those three counties.

The high level of leasing activity suggests the larger industrial users and tenants have run their logistic cost minimization models and concluded that Southern California will continue to be the primary location in the U.S. to have facilities. In a recent real estate conference in the City of Long Beach California, the panelist were claiming that medium and smaller size manufacturing firms are continuing to expand in Southern California because that is where the owners and decision makers want to live. The substantial level of industrial absorption in 2010 and 2011 supports the conclusion that manufacturing, warehousing, and distribution will continue to expand in Southern California, especially in the Inland Empire.

The absorption of industrial space in the Inland Empire at such a high level, will continue to create employment opportunities for workers that live in the High Desert; and eventually it will significantly increase the absorption of Industrial Warehouse space in the High Desert.



Snapshot of the Commercial and Industrial Real Estate Markets in the High Desert

Published by:

By Ronald J. Barbieri, Ph.D., CPA
The Bradco Companies

Office Market

As of June 2012, the High Desert had almost 5.5 million SF of office space. The net absorption for the first half of 2012 was 17,524 SF compared to 26,287 SF absorbed in 2011 and 133,281 SF absorbed in 2010. The vacancy level at the end of the 2nd quarter 2012 was 322,000 SF or 5.9% of the total inventory. There was only a slight increase in the demand for office space in 2011 and the first half of 2012, which resulted in a small decrease in the vacancy rate. Most of the increase in office space demand over the last two and one half years was from the expansion by local government and the medical profession. Because of bud¬get constraints the demand for office space by the government sector is not likely to increase in the next two years. There was 3,480 SF of office space in Apple Valley under construction as of June 2012. While the office space is only slightly over¬supplied, there has not been any significant increase in the demand for space in the High Desert in the last year and a half. This has caused office rental rates to decline over the last 18 months.

Snapshot of the Commercial and Industrial Real Estate Markets in the High Desert

Retail Market

There was 15.6 million SF of retail space in the High Desert of which 1,390,000 SF was vacant at the end of the 2nd quarter 2012. This represents a vacancy rate of 8.9%. The demand for retail space has been basi¬cally flat over the last 2-1/2 years. The High Desert experienced a net absorp¬tion of 56,000 in the first half of 2012, compared to a net negative absorption of (60,472) in 2011. In 2010 the High Desert absorbed 210,655 SF in 2010. The only retail space under construction is the 58,000 SF that Macy’s is adding to the vacant 70,000 SF former department store in the Victor Valley Mall. However, this will not be reflected in the absorption figures until 2013. Two super Walmarts in Victorville and Hesperia were under construction as June 30, 2012. Another super Walmart is likely to be built in Apple Valley by 2014; and two more are planned for Victorville.

Industrial Market

There was 20.4 million SF of industrial space in the High Desert at the end of 2011. The vacancy rate was 4.7% or 957,000 SF. The net absorption in the first half of 2012 was 294,000 SF. Thiscompares to 969.000 SF in 2011 and 967,000 SF in 2010. There was no in¬dustrial space under construction as of the end of the 2nd quarter 2012. Most of the absorption over the last 2.5 years was in the large boxes. Substantial warehousing and distribution as well as manufacturing companies accounted for the increase in demand. The City of Adelanto absorbed 250,000 SF in 2012, which represented 85% of the increase in the demand for industrial space in the High Desert during the first half of 2012. A 170,000 SF addition to Rubbermaid’s existing facility at SCLA in the City of Victorville is under construction; and a 75,000 SF expansion of True Blue’s fa¬cility has started in the Town of Apple Valley.


Economy Property

The Demand for Industrial Space in the High Desert has Increased Substantially Over the Last 18 Months

Published by:

By Ronald J. Barbieri, Ph.D., CPA
The Bradco Companies

There are two different classes of industrial tenants and users in the High Desert. One class consists of the large box users. They typically are warehousing and distribution firms, such as Wal-Mart in the Town of Apple Valley, or large manufacturing operations, such as United Furniture Industries at SCLA in Victorville. Such companies usually occupy buildings in excess of 50,000 SF. The second consists of smaller manufacturing or distribution firms that for the most part cater to the local population and businesses or are niche manufacturing players in the regional market. They are typically small space users that occupy single or multi-tenant buildings of 50,000 SF or less. The average floor area of the small buildings is 10,200 SF.

The graph below categorizes the industrial inventory in the High Desert by city as well as by whether or not the structures are greater than 50,000 SF. It also segregates the industrial space in the City of Victorville into the inventory at SCLA and the non-SCLA portion of the city. Of the 20.5 million SF of industrial inventory in the High Desert, 8.5 million SF is associated with buildings of 50,000 SF or less. The remaining 12.0 million SF is in buildings greater than 50,000 SF. The City of Victorville has almost 8.4 million SF of industrial space, of which 4.5 million SF is located at SCLA. The balance of 3.9 million SF is in the Foxborough Industrial Park, which the city developed, and in several other industrial sub-markets throughout its incorporated area. The City of Hesperia is home to 4.6 million SF of industrial inventory, much of which is in the older industrial area north of Main Street between the railroad tracks and I Avenue. Adelanto accounts for 3.3 million SF while the Town of Apple Valley has 2.8 million SF. Barstow has 1.4 million SF of industrial space.

The Demand for Industrial Space-Graph 1

As of June 30, 2012, the vacancy rate in the High Desert for buildings 50,000 SF or less was 5.4%, while for larger buildings it was 4.2%. The City of Barstow had the highest vacancy rate for buildings over 50,000 SF. It was 36.2%. The vacancy rate for the smaller buildings in Barstow was 6.8%. The non SCLA portion of Victorville had an 8.1% vacancy rate in the smaller buildings, but zero in the larger structures. In the Town of Apple Valley there was no vacancy in the larger buildings but the rate for the smaller buildings was 8.2%. The smaller buildings in the City of Adelanto had a vacancy rate of 3.1% while the larger buildings had no vacancy. The vacancy rate for smaller buildings in the City of Hesperia was 3.6% compared to 11.6% for larger buildings. For an area the size of the High Desert the stabilized vacancy rate is approximately 5% so long as the demand for industrial space is expanding.

The Demand for Industrial Space-Graph 2

From January 2011 through June 2012 the High Desert experienced a Net Absorption of 1,281,000 SF. SCLA accounted for 1,067,000 SF, of which 1,113,000 SF was in the larger industrial buildings. The City of Adelanto gained almost 121,000 SF in industrial demand all of which was associated with smaller buildings. During the same period the Town of Apple Valley had a Net Absorption of 25,000 SF, somewhat evenly split between smaller and larger sized buildings. The City of Hesperia absorbed over 94,000 SF; in spite of the fact that there was a slight decrease in occupancy in the larger buildings. The City of Barstow experienced a decline in industrial occupancy of approximately 54,000 SF all in larger buildings, while the non SCLA portion of the City of Victorville recorded 27,000 SF of positive absorption.

The Demand For Industrial Space-Graph 3

Economy Property

Real Estate Market Recovery?

Published by:

By Dr. Alfred J. Gobar
Chairman, Alfred Gobar Associates

As illustrated in Exhibit A, the recent recession was considerably deeper in percentage terms than the one that affected Southern California after June 1990. Sadly, the recovery from the most recent recession is a good deal more anemic than was the previous recovery, suggesting happy times for real estate properties (except for those who know how to profit from adversity) are still in the distant future.

Occasionally people wonder why nonagricultural wage and salary employment, as illustrated in Exhibit A, figures in so many of the graphs we use. The reason for that is shown in the graph in Exhibit B. The little triangles are estimates of the number of occupied units in the United States based on a statistical model, the major input to which is nonagricultural wage and salary employment. The little squares in the graph are actual households as reported by the U.S. Bureau of the Census.

For those of you with an unhealthy interest in statistics, the statistical model has estimated the number of occupied units nationwide with an R2 coefficient of correlation of 0.9867. In economics, this type of correlation usually implies the analyst is cheating. As can be seen, the estimate of number of households nationwide based on statistics has been flat since 2005. It is not expected to turn sharply upward in the immediate future—based on the trends in Exhibit A. The number of occupied units probably will rise above the estimate as the data evolves. Anecdotal information indicates that many households are living in homes on which they are no longer making payments on the mortgage—i.e., economic recovery is often less than physical occupancy in times of financial duress.

With more specificity with regard to Southern California (Ventura, Los Angeles, Orange, Riverside, San Bernardino, and San Diego Counties), growth in nonagricultural wage and salary employment in the twelve months ended February 2012 totaled 62,600 jobs. This is well below the long-term average in the six-county area during periods of normal housing markets—approximately 150,000 new jobs a year. Actually, employment growth in nonagricultural wage and salary employment over the most recent twelve months was considerably less than the comparable figure for the twelve-month period ended February 2011. Southern California’s economy (and therefore its real estate market) is not recovering rapidly. In fact, these statistics indicate the opposite.

Categories of nonagricultural wage and salary employment experiencing continued decline include construction, certain portions of the financial sector, and local government, as well as the information sector as newspapers become technologically less efficient than they were prior to the Information Age. Somewhat surprisingly, manufacturing employment grew during the twelve-month period contrary to the long-term trend over the last 15 years of a secular decline in manufacturing employment throughout the United States and with special regard to Southern California.

In 1969, analysts at Alfred Gobar Associates noticed the relationship between nonagricultural wage and salary employment and housing market trends. This led the number crunchers at the consulting company to develop a plethora of algorithms which incorporate generally available time series economic data published by the government and other sources into “models,” which simulate housing market conditions for each Metropolitan Statistical Area in the United States overall. The efficacy of these models with regard to the housing markets in each of these Metropolitan Areas was tested against the Census data for 1970, 1980, 1990, and 2000. Since Dr. Gobar’s retreat from consulting, less attention has been paid to the statistical simulation models, although kindly old Dr. Gobar did fund an analysis of the efficiency of the models in terms of estimating the number of occupied units by Metropolitan Statistical Area as of the date of the 2010 Census.

The output of the most recent update with extensions to Third Quarter 2011 is a basis for illustrating housing market conditions in each of the Metropolitan Statistical Areas that make up the Southern California market in which the Inland Empire is such an important segment.

The conventional output of the models, which was used by such investors as PMI, GE Capital, Nationwide Builders, etc., from the 1970s to the 1990s consisted of a total of 17 pages for each market. In the interest of simplicity, many of the outputs were combined into indices. The simplified index of housing market conditions for the Inland Empire is shown in exhibit C.

Although the statistical simulations of current market conditions overall in the Inland Empire are not quite as bad as they were at the depth of the 1990’s recession, the current trend is still down. The indices for this market have deteriorated fairly consistently since Third Quarter 2006. Housing price in the Inland Empire (as well as Southern California overall) has historically been high relationship to the ideal price structure. Because of declining demand derivative of the recession, even with the decreasing prices in the Inland Empire, the relationship between price and income is still not comfortable.

A similar index for Los Angeles County, which continues to be the largest economic entity in Southern California, is as follows in exhibit D. Currently the index on an overall basis is lower than at any time shown. The index suggests that spillover demand from Los Angeles County is not soon likely to be a major element in housing demand in the High Desert.

The exhibt E index for Ventura County shows overall market conditions about similar to what they were during the worst of the 1990s:

Between Third Quarter 2010 and Third Quarter 2011, Ventura County’s economy improved enough that incremental demand exceeded the incremental supply of new housing based on very feeble building permit activity in prior months in Ventura County in 2009 and 2010. The most recent index point is actually up a little bit from the two previous index points for the Ventura area.

Another of the Southern California economies that has suffered less than the Inland Empire is Orange County, see the graph in exhibit F. The index for Third Quarter 2011 was higher than in Third Quarter 2009 or 2010, indicating a very modest improvement in relative supply and demand conditions in housing in the Orange County Metropolitan Statistical Area.

By far the strongest recovery of the housing market in Southern California is in San Diego County where the index has been improving for about three years, and incremental demand has exceeded incremental supply, see exhibit G

As shown, the low point of the index in recent years is well above the comparable indicator for the 1990’s recession.

This column has referred in the past to economics as the “dismal science.” In a vain hope to counter this probably accurate definition of my life’s work, we have included a comparable graph (Exhibit H) for a market that is currently in much better condition:

This market appears to have been immune to the recession and, in fact, from 2006 to 2011 the index for the market increased year by year, while the price index shows that housing prices in the market are less than they need to be in terms of the consumer support levels driven by the local economy.

Another regional economy which reflects stronger-than-typical housing market conditions is illustrated by the exhibit I graph.

Although there has been some decrease in overall market strength (i.e., demand exceeds supply), it still remains a very viable real estate market in comparison with much of the U.S. Perhaps Joseph W. Brady wants to sponsor a contest for readers of this column to identify these two mystery markets which are apparently doing well despite the abysmal conditions in much of the rest of the U.S. (at least the statistics are a whole lot better).

An interesting anomaly related to the most recent analysis of these statistical data concerns the composition of employment growth. As noted in the early part of this column, nonagricultural wage and salary employment grew less between 2011 and 2012 than it did in the prior twelve months. Another source of employment data, however (based on the household survey), reflects a humungous increase in employment as reported by individual households. Typically, the difference in estimated employment between the household survey and the establishment survey relates to contract workers, small entrepreneurs, underground employment, etc. For long periods of time, the employment levels estimated on the basis of the employer surveys have been about ±87.0 percent of the employment levels estimated on the basis of the household survey. The most recent data available, however, suggests that reported change in nonagricultural wage and salary employment based on the employer survey was 58.0 percent of the level of employment change estimated on the basis of the household survey. Either an awful lot of people are working “off the books” or there is a glitz in the reporting or our interpretation of the numbers. We have been interpreting these numbers for roughly 40 years and have never seen this kind of relationship before. Since it is a one-time event, it could have been a typographical error, a simple transposition, or some other statistical screw-up. Not too much should be inferred from this unusual circumstance. Nonetheless, it is consistent with what we expected to happen with the onset of a highly-regulated society—an increase in informal employment as the market system worked to side-step a stifling bureaucracy. The late Jack Kyser and I discussed the implications of the Obama Administration’s ideology at a meeting a little over two years ago and hypothesized that the informal economy would grow faster than it has in the past in response to overregulation, mitigating to some extent the negative effects on growth of a highly-regulated economy.

If, in fact, the informal job growth was actually as great as the statistics seem to indicate, the overall condition of the market should be better than the graphs shown above suggest.

Let’s hope so.

Readers interested in reviewing Dr. Gobar’s observations about the statistical relationship of real estate market behavior to conventional economic time series data are referred to his book which is available from Alfred Gobar Associates.

Economy Property

Industrial Firms Continued to Absorb Space in the Inland Empire at a Very High Rate in 2011

Published by:

By: Ronald J. Barbieri, Ph.D, CPA

One of the primary economic drivers of the Inland Empire and therefore the High Desert is the expansion of warehousing and distribution facilities as well as manufacturing operations in the Inland Empire. Such industrial operations provide Base Employment for the region which in turn generates Secondary Employment in other economic sectors of San Bernardino and Riverside Counties. Over 60,000 residents of the High Desert commute to the Los Angeles Basin for work. This represents approximately half the workforce of the High Desert. Hence, an increase in the demand for industrial space in the Inland Empire has a positive indirect effect on the High Desert.

Also, the absorption of industrial space in the Inland Empire would further reduce the limited supply of industrial land in the Los Angeles Basin. A study by John Husing dated August 2008 determined there were only 4,860 acres of land in the Los Angeles Basin portion of the Inland Empire that could be developed for industrial use. This number could be significantly reduced over the next few years, thereby reducing number of sites that are rail served or can accommodate the development of large industrial buildings. It will not be long before the very large industrial tenants or firms that require rail will have to locate in the High Desert or in the area along the I-10 Freeway in Banning, California; The migration of more industrial firms to the High Desert would create more Base Employment in the area, which in turn could generate additional Secondary Employment. This would lead to lower unemployment rates in the greater Victor Valley area.

There is 499 million Square Feet (SF) of industrial space in the Inland Empire. This is equivalent to half the inventory of industrial space in the greater Chicago area. Costar defines 482 million SF as Warehousing/Industrial space. The remaining 17 million SF is in smaller Industrial Flex space. The High Desert currently accounts for slightly over 4% of the total inventory; but in the intermediate term and beyond it is expected to be the primary expansion area for industrial development in the region. Southern California is home to almost 2.0 Billion SF of industrial space. Much of the increased demand for industrial space in the Inland Empire is attributed to firms relocating out of Los Angeles County in search of industrial sites on which to build larger, more efficient facilities. The vacancy rate for Warehousing/Industrial space in the Inland Empire has increased from 5.2% at the end of 2004 to 12.2% by the end of 2009. The increase in vacancy was the result of overbuilding rather than a decline in industrial demand. The vacancy rate at the end of the Fourth Quarter 2011 declined to 7.5%. Very little inventory was added in 2010 and 2011; but there was a substantial absorption of large box industrial space during that two year period. If the vacancy rate declined to 5% the industrial market in the Inland Empire would be in equilibrium. That could occur by 2013 if the developers do not build an excessive amount of inventory that is not preleased. Developers are beginning to build spec large box industrial space in the Los Angeles Basin.

There are a limited number of sites in the Los Angeles Basin that can accommodate large industrial boxes greater than 800,000 SF. Industrial tenants and users wanting larger facilities will have to locate either in the High Desert, Moreno Valley, or Banning California. The lack of larger industrial sites in the Los Angeles Basin could result in a substantial increase in the level of industrial development in the High Desert beginning as early as 2015.

In calendar year 2007 the Net Absorption of industrial space peaked at almost 27 million SF. In 2008 industrial demand increase by 4.6 million SF; but in 2009 the Net Absorption was a negative 400,000 SF. Net Absorption in the Inland Empire was a positive 12.1 million SF in 2010 and 15.0 million SF in 2011. A portion of the increase in Net Absorption was caused by the acceleration of demand due to relatively low rents compared to prior years. The increase in industrial demand in the Inland Empire in the last two years is substantial, especially in light of the slow economic recovery in both the U.S. and California. In fact the Inland Empire only experienced one year of negative industrial absorption during the last recession.

From 2005 through 2008 an average of 26.1 million SF of Warehousing/Industrial space was delivered annually in the Inland Empire. Deliveries declined to 7.0 million SF in 2009. Only 1.7 million SF was delivered in 2010; while 3.8 million SF was completed in 2011. The level of new construction has definitely increased in the last year. This limited level of construction coupled with the unanticipated increase in industrial absorption has resulted in the elimination of half of the Excess Vacancy in the market place.

The vacancy level was 22.1 million SF at the end of 2005. It peaked at 57.9 million SF by the end of 2009. As of the end of 2011 it had declined to 36.5 million SF. There is still an estimated 15 million SF of Excess Vacant space in the Inland Empire; but the industrial agents in the Los Angeles Basin are now reporting Excess Demand (no vacancy) for buildings of 500,000 SF and larger. Most of the vacancy is in the medium and smaller size buildings often occupied by small businesses that have not experienced much growth since the Great Recession.

Industrial agents are now suggesting there will be a new wave of construction for buildings larger than 500,000 Square Feet. When this is coupled with the fact there are only 4 sites in the Los Angeles Basis that can accommodate a building greater than 800,000 SF it is logical to conclude it will not be long before the High Desert will be able to successfully compete for the larger warehousing and distribution tenants. A higher level of industrial development will occur in the High Desert, though the timing is uncertain, and unfortunately very much a function of public policy that will be determined in Washington and in Sacramento, California.

In spite of all the political and economic uncertainty the big box industrial market in the High Desert is likely to add one or more users each year for the next few years before the increase in demand accelerates in the second half of this decade. This will probably be the case because large industrial users will continue to relocate from Los Angeles County to the Inland Empire in order to build larger, more efficient facilities. As the availability of large industrial sites in the Inland Empire diminishes those seeking larger sites will have no choice but to locate in the area of Banning, California or in the High Desert. Only an economic depression would defer this from happening.

All the inventory, absorption, and construction information contained in this article was obtained from reports The Bradco Companies generated from Costar. These numbers are deemed to be accurate by real estate industry standards; but they are not exact and subject to change.

Economy Property

Snapshot of the Commercial and Industrial Real Estate Markets in the High Desert

Published by:

By Ronald J. Barbieri, Ph.D., CPA

Office Market

As of the end of 2011, the High Desert had almost 5.5 million SF of office space. The net absorption for 2011 was negative 8,900 SF compared to the 135,000 SF absorbed in 2010. The vacancy level at the end of last year was 347,000 SF or 6.4% of the total inventory. The increase in the vacancy rate was mostly due to the delivery of 62,000 SF of office space in the second half of last year. Most of the increase in office space demand over the last two years was from the expansion by local government and the medical profession. There was 25,000 SF of office in Apple Valley under construction as of the end of 2011. The new construction is targeted for medical users. While the office space is only slightly oversupplied, there has not been any additional demand for space in the High Desert. This has resulted in a slight decline in rental rates over the last year.

Retail Market

There was 15.6 million SF of retail space in the High Desert of which 1,352,000 SF was vacant at the end of 2011. This represents a vacancy rate of 8.7%. The High Desert experienced a negative net absorption of 67,000 SF in 2011, compared to a positive 262,000 SF in 2010. Only 6,900 SF was delivered in the second half of that year. Macy’s has announced that they would be moving into a vacant 70,000 SF former department store in the Victor Valley Mall and adding an additional 30,000 SF to the structure. However, this will not be reflected in the absorption figures until early 2013. Three super Wal-Marts in Victorville, Hesperia and Apple Valley are under construction and are expected to be completed this year.

Industrial Market

There was 20.4 million SF of industrial space in the High Desert at the end of 2011. The vacancy rate was 6.1% or 1,241,000 SF. The net absorption in 2011 was 978,000 SF, which was approximately the same the prior year. There is 49,600 SF under construction. Most of the absorption was in the large boxes. Substantial warehousing and distribution as well as manufacturing companies counted for the increase in demand. The cities of Adelanto and Barstow accounted for the negative absorption in 2011. The City of Victorville absorbed over 1,000,000 in both 2010 and 2011. Most of this increased demand occurred at SCLA.


High Desert Assessed Values

Published by:

By Dan Harp, Assistant Assessor-Recorder

The County Assessor is responsible for the assessment of all taxable property within their respective counties, except for State Board of Equalization assessed property which includes utility-owned property and railroad property. The Assessor’s role involves three main objectives: (1) discovering and taking inventory of all taxable property within the county; (2) determining the taxability of each item of property; and (3) valuing and assessing each item of property in accordance with property tax law.

Proposition 13, which was overwhelmingly approved by California voters in June 1978, is the basis for property tax assessment today in California and all of its 58 counties. Prior to the passage of Proposition 13, property taxes could increase dramatically from year to year based on assessed value of the property. Proposition 13 limits the tax rate to 1 percent plus additional rates necessary to fund local voter-approved bonded indebtedness. It limits the property tax increases to a maximum of 2% per year on properties that did not undergo a change in ownership nor had completion of new construction. Proposition 13 placed explicit limitations on the power of government to impose additional property taxes and it requires real property to be assessed at its current market value upon a change in ownership and new construction is to be reappraised at its current market value as of its date of completion. Proposition 13 has been amended numerous times since 1978 resulting in several change in ownership and new construction exclusions from reassessment. Some of the more common exclusions are:

  • Reappraisal exclusion for parent/child transfers – property transferred between parent and children may be excluded from reappraisal. A timely filed claim form is required along with other statutory requirements and limitations.
  • Reappraisal exclusion for property owners age 55 and older – property owners age 55 or older may transfer their Prop 13 value from their original principal residence to a replacement residence if the replacement residence is of equal or lesser current market value compared to the original property and is located in the same county. A timely filed claim form is required along with other statutory requirements and limitations.
  • Property acquired or constructed to replace property destroyed in a disaster – owners of property that is substantially damaged or destroyed by a Governor-declared disaster may transfer the Prop 13 value of the damaged property to a comparable replacement property within the same county. A timely filed claim is required along with other statutory requirement and limitations.
  • Exclusions from market value assessment as a result of new construction include the following: addition of an active solar energy system, additions of fire sprinkler systems, seismic retrofitting and earthquake hazard mitigation features applied to existing buildings, and modifications to make an existing residence or structure more accessible to a severely and permanently disabled person.

When Proposition 13 was originally enacted in 1978, it did not provide the Assessor the ability to reduce assessments resulting from a decline in market value if the property was owned by the same taxpayer. California real estate was appreciating at record levels in the late 1970s so the drafters of Proposition 13 did not have the foresight or envision a need to allow Assessors the ability to reduce assessments resulting from economic conditions, depreciation, damage, obsolescence, or other factors causing a decline in value. Proposition 8 was approved by the voters in November 1978 to remedy this oversight in Proposition 13. Proposition 8 allows the Assessor to make reductions to assessed values when property has been damaged or its value has been reduced by other factors such as economic conditions. The Assessor can recognize declines in value if the market value of the property on lien date (January 1st) falls below its Proposition 13 value or stated otherwise, the correct value to be enrolled in any year is the lower of a property’s Proposition 13 value or its current market value. For example, if the current market value of one’s home on January 1st is $125,000 and its corresponding Proposition 13 value is $174,556, the assessed value for that particular assessment year should be reduced to the current market value of $125,000. It is important to note that a property owner may lose a substantial amount of equity in the property because of a declining real estate market but that does not necessarily mean the assessed value is incorrect. For example, the current market value of one’s home on January 1, 2007 is $360,000 and its current market value on January 1, 2012 is $150,000. The owners purchased the property in 1998 and their January 1, 2012 Proposition 13 value is $110,556. Even though the property owner has lost $210,000 in equity, its assessed value is still correct because the Proposition 13 value of $110,556 is less than the January 1, 2012 current market value of $150,000.

During the mid- 2000s, San Bernardino County experienced unprecedented appreciation in real estate prices in all areas of the county, which resulted in double-digit increases to the assessment roll for years 2004 through 2007. The 5 High Desert cities and adjoining unincorporated areas showed a particularly robust increase in their assessed values for years 2004 through 2007 then stabilizing in 2008. The peak of the real estate market in San Bernardino County occurred in 2007, stabilized in 2008 and then began its steep decline. During the late 2000s, the 5 High Desert cities and adjoining unincorporated areas were especially hard hit with decline of real estate values and substantial decreases to the assessment roll.

The decline in the real market created an assessment situation county-wide in which thousands of properties were over assessed because the current market value was now less than their Proposition 13 thus the Assessor was faced with Proposition 8 reductions on a mass scale. As with the case where the High Desert experienced the highest rate of increased real estate values during the real estate boom, conversely the High Desert experienced the highest rate of decrease in values when the real estate bubble burst. The effect the collapse of the real estate market had on the San Bernardino County assessment roll is staggering. Approximately 186,000 parcels have been reduced under Proposition 8 reductions and the total assessed value removed from the assessment roll for 2008 through 2011 is $27.3 billion.

There are several factors that contribute to assessment roll growth and decline. Assessment roll growth is a result of 3 primary components: (1) change of ownership reappraisals in an appreciating real estate market; (2) abundant new construction, both residential and commercial; (3) assessed value added by the 2% California Consumer Price (CCPI) index factor. Assessment roll decline is the result of 4 primary components; (1) change of ownership reappraisals in a declining real estate market; (2) dearth of new construction; (3) assess value added/deducted by the CCPI factor – for 2010 and 2011 the CCPI was minus 0.237% and 0.753% respectfully; (4) Proposition 8 reductions. property revenue collected on the basic 1% tax rate is used to support local schools, cities, special districts, the county, and redevelopment agencies (dissolved as of 2-1-2012). As one can imagine, when assessed values are increasing property tax revenue supporting schools, cities, county, etc. are increasing. Conversely, when assessed values are decreasing property tax revenue to schools and local government is reduced, which is the current situation in San Bernardino County and the State of California.

The compilation of the 2012 assessment roll will not be completed until June 2012 and will be certified by the Assessor July 1, 2012. It is projected the San Bernardino County assessment roll will decrease by 1% from 2011 and the High Desert portion of San Bernardino County is projected to experience a similar 1% decrease.

Economy Property

In the Home Building Industry, the Indicators May Finally Point Upwards

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By Carlos Rodriguez
CEO Building Industry Association Baldy View Chapter

The inland counties of San Bernardino and Riverside have always been the ultimate beneficiaries of job creation and housing demand that begins in the more densely populated coastal counties; San Diego, Orange and Los Angeles. So homebuilders in San Bernardino County (and most importantly the Victor Valley) have always taken a special interest in keeping a finger on Southern California’s economic pulse.

And the pulse seems to be growing stronger, according to an overall assessment of the recent Inland Empire 2012 Builder Panel and Economic Forecast presented by the Building Industry Association (BIA) Baldy View and the Riverside County chapters. Summing up the general tenor of the presentation, panel moderator MetroStudy Director Steve Johnson noted that the overall theme of the event was that homebuilders “have changed their processes, they’ve changed the way they do things, they’ve changed the products in search of success – and they are getting that success this year.”

The event featured Panelists KB Home Division President Steve Ruffner, Lennar Division President Greg McGuff, Pardee Home Director of Sales Peter Altuchow, and Standard Pacific Division President Marty Langpap assessing the building climate as the industry enters 2012.

Panelist McGuff observed that the overall tenor of the event was to exhibit “positive builder confidence out there and a lot of pride in how far the industry has come in meeting the buyers’ needs.” McGuff noted that themes absent from previous builder forecasts were beginning to emerge, including indications of positive job growth and builders’ heightened interest in purchasing land.

Another aspect of the recovery is that home builders are increasingly expanding their product lines to include niche markets such as multi – generational and move up buyers, said Donna Lawler of Orange Coast Title, Co. Projects such as Lennar’s Rosena Ranch have adjusted their product lines to provide homes for these types of buyers, and will represent the new face of construction in the Inland Empire.

While the overall permit figures in 2012 may paint a fairly dismal picture, the story they reveal is actually fairly heartening, added BIA Baldy View President Jonathan Weldy of Meridian Land Development.

According to figures from the Construction Industry Research Board (CIRB), in 2011, San Bernardino County homebuilders issued about 1,465 single- and multi – family permits. While a far cry from the nearly 17,000 permits issued at the height of the building boom in 2005, today’s figures show a far more diverse building landscape. Where only a fraction (less than nine percent) of the overall permits issue in 2005 were for multi – family housing, over the past few years, homebuilders have been building increasingly larger proportions of multi – family housing. This is especially important because when multi – family housing was unable to keep pace in the boom years, it forced many families into riskier mortgages on single family homes. With a graying population of ‘Baby Boomers’ and young people finding dismal prospects in today’s job market ‘boomeranging’ from colleges back into their parents’ homes, offering a greater diversity of housing opportunities for our labor pools will offer businesses a greater incentive to relocate or expand in the region and create even more new jobs.

Assessing the permit totals always tells a story. This year the story shows that the I-15 Corridor cities (Ontario, Rancho Cucamonga, Fontana, Hesperia, Victorville, Apple Valley and the unincorporated county sections surrounding those cites) accounted for nearly two – thirds of the total permits in the county – and nearly half of those from Victor Valley cities.

Residential construction in the Victor Valley and along the I-15 corridor cities leading to the region holds the key to San Bernardino County’s economic recovery, and the Building Industry Association (BIA) Baldy View Chapter maintains programs to ensure it happens.

The big issue confronting builders in the High Desert continues to be water and every August for the past six years the BIA Baldy View Chapter has presented the Annual San Bernardino County Water Conference. The conference focuses on the key water issues confronting home builders, such as conservation, conveyance, and emerging new technologies to maximize and conserve our most precious resources.

Keeping development impact fees (DIFs) at realistic levels to spur economic growth while maintaining the best possible cities in Southern California is another key factor in the chapter’s overall approach to rehabilitating our housing markets. Here in the Victor Valley, the Baldy View Chapter continues to monitor all development impact fees for cities, school and water districts to ensure the fee’s accuracy and proper implementation. The chapter has also coordinated closely with local, county, and state levels of governance to monitor general plan updates and development codes. We are also working with our colleagues at BIA of Southern California to advocate for the balanced implementation of SB 375.

Homebuilding remains the cornerstone of our region’s economy, and there are some positive economic signs that the construction industry and our economy are headed in the right direction. We remain optimistic that our industry will emerge from this unprecedented downturn and provide the engine for the economic recovery that our region desperately needs.

The Building Industry Association (BIA) Baldy View Chapter represents homebuilders and associates in the housing industry in all of San Bernardino County and the easternmost portion of Los Angeles County. Founded in 1938, the Baldy View Chapter is the most honored homebuilding chapter in the nation. It is a member of the California Building Association (CBIA), a statewide trade association representing nearly 6,000 businesses, including homebuilders, remodelers, subcontractors, architects, engineers, designers, and other industry professionals.