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
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
“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
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
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
“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
“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
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
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
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.