Though the stock market is showing modest improvement (if it is not a “dead cat bounce”), the same cannot be said for the growing number of distressed commercial properties in California. Many cash-strapped businesses have downsized their work forces and have ceased new hiring. As a direct result of this labor force reduction, the need for office space (and all other space) has withered at the same pace.  In the greater Los Angeles area, nearly 51 million square feet of office property remains vacant – over 17% of all office space in this four county region.

first tuesday take: No segment of the California real estate market is immune to recessions, be it residential or commercial. As happened during all previous recessions, the job-loss ripple is being felt everywhere; less in some areas (Santa Barbara/Marin), more in others (Riverside/Central Valley). It’s an unavoidable truth: job losses decrease employers’ need for space. And while this explains why commercial real estate is stagnating now, it is also an omen of the immediate future – commercial real estate can do nothing but flounder throughout 2010 and beyond until job numbers in California find their bottom and employers see reason to hire again. Once they do and fill up the surplus of space they still have under lease (or ownership), probably in 2012, they will then start looking for more space to rent or buy to accommodate the return of workers. This need for additional space will increase year over year until it returns by 2015 to the peak demand levels for space achieved in 2007. The pressure for more space will be on us in 2015 and the years just beyond.

But we’re not at that bucolic point quite yet.

The horizon for nonresidential property, and lurking to hit its residential brethren in 2010-2011, is an upward rate adjustment on their mortgage, and worse, due dates unknown to residential properties. Like many residential purchasers during the boom, a large volume of nonresidential property investors were suckered into an adjustable rate mortgage (ARM) or balloon payment condition – short-term loans to finance a long-term investment, real estate. The time to renegotiate due dates or refinance is rapidly approaching for many owners of income property.

For those in real estate who saw this coming and piled up cash reserves, the time to fill their boots with property on the cheap is about here. Brokers and agents need to locate these cash-heavy real estate investors and get acquainted.

Re: “Southern California’s vast desolation indoors,” from the Los Angeles Times.