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Economic Forecast Cloudy

By Jorge Casuso

January 17 -- Ask local economists to look into a crystal ball for next year’s forecast, and they’ll agree clouds are gathering on the horizon, as the boom in the real estate market and new housing construction seems to be reaching an end.

But whether a halt in rising home prices, or even a downturn, will bring shadows to a sunny economy that continues to see commercial rents climb, or presage a looming storm is still unclear, experts said.

“Although there will be turbulence, the economy appears to be on course for a soft landing,” said David Shulman, senior economist for the UCLA Anderson Forecast. “The economy almost certainly will not be too hot, and if we are correct in our view that recession is not on the horizon, it will not be too cold.”

Los Angeles County will see “somewhat slower growth in 2007,” but there will still be growth, especially in international trade, tourism, technology and professional business services, such as law, accounting and computer systems design, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corporation.

But others are far more pessimistic. As the housing bubble deflates, some economists predict homeowners will curb a spending spree that has spurred a retail boom and kept the Downtown economy humming.

“You feel it in the air,” said Christopher Thornberg, a partner of Beacon Economics, an economic forecasting firm, and former economist for the UCLA Anderson Forecast. “Things are starting to slow, and it boils down to real estate.”

“People have been feeling wealthy,” Thornberg said. “They’ve been spending money, but that’s coming to an end. People are spending more than they’re earning. That’s very scary. This is what worries me.”

The impacts of housing prices leveling off if not dropping, will likely be finally felt in the first half of the year, Thornberg said.

“The housing boom ended in 2005,” he said. “It’s a slow-motion train wreck. The key to this thing is that people don’t internalize it into spending until the first or second quarter.

“We’ll feel the real estate popping not only in our homes, but in our pocketbook,” Thornberg said. “The outlook is bleak. Consumers can’t keep spending.”

Although the upscale retail market is hanging in, the low-end market is already feeling the “crunch,” Kyser cautioned.

“People are willing to buy high-end merchandise if it’s on sale,” Kyser said. “So far, the high-end retailers are doing fairly well, but the problem is, do they have to do more promotion? Auto dealers are having to offer a lot of incentives.”

If the economy stays on course during the first part of next year, the forecast will grow foggy come next fall, Kyser said. “There is a flashing yellow light out there, especially in the entertainment industry,” he said.

The Writer’s Guild contract expires in October, and the union has announced it won’t enter into negotiations, which will be complicated by a battle over rights in new media, until September, Kyser said.

A strike could paralyze the industry, creating a ripple effect through the economy, especially in the Westside and Santa Monica, which is home to a slew of entertainment companies and hosts the American Film Market.

“Santa Monica is part of ground zero,” Kyser said. “You have a lot of film market events.”

Despite the gloomier-than-usual predictions, there are some bright spots in the forecast.

“We’re looking for a fairly decent year,” Kyser said. “We look for the U.S. dollar to continue to decline, so international tourists will come to Southern California.”

The outlook is especially bright for commercial real estate, where five years after the dot.com bomb leveled the Westside market, higher rents and higher demand for office space in areas such as Santa Monica may have no end in sight.

“If you look at vacancy rates (on the Westside), it is now getting close to what it was before the dot-com frenzy,” said Neil Resnick, vice president and managing director of Grubb & Ellis Company, one of the nation’s largest commercial real estate advisory firms. “The difference now is it is real growth.”

Fueled largely by growth in the entertainment industry, the Westside as a whole saw a 7.1 percent vacancy rate in the third quarter of this year, a few percentage points higher than the all-time-low of 5.8 percent before the dot-come bust, Resnick said.

However, this time there may be no implosion, he said. “These are well-established companies with longevity… (and) they are making money,” said Resnick, himself a member of a start-up dot-com before the industry went bust.

Since mid-2004, the Westside has seen an upswing of nearly 20 percent in rents for commercial spaces, he said. While Beverly Hills has the lowest vacancy rate at 4.4 percent, Santa Monica remains in high demand with a 6.6 percent vacancy.

In addition, average asking prices could soon climb to more than $4 a square foot in the seaside city, according to Resnick. One area where demand has risen in the past few years is around the Third Street Promenade and along the industrial corridor between Olympic and Colorado Avenue.

“Santa Monica is one of the healthiest markets on the Westside,” said Grubb & Ellis Vice President Joseph Gabbaian, who specializes in Santa Monica commercial real estate. “Rents are increasing across the board.”

On the Promenade, which claims the highest rental rates in the city – retail spaces are now going for between $10 and $12 a square foot, Gabbaian said.

And Santa Monica can expect even more demand, higher rents and lower vacancy rates due to a dearth of new construction.

“I can't think of a single commercial project that is being built in the City right now,” he said.

While many presage a slump ahead, the general forecast for the Westside remains clear in the long run, experts said, especially if the Metro rail line is extended to the Downtown Santa Monica, alleviating the traffic and parking woes that could keep economic growth in check.




“Things are starting to slow, and it boils down to real estate.” Christopher Thornberg


“There is a flashing yellow light out there, especially in the entertainment industry.” Jack Kyser


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