Writing this from my office at home in between a myriad of Zoom calls, it is immediately obvious how quickly our world has shifted in the past two months. Yes, things will return to normal — albeit a new normal — once the medical crisis is under control. Yes, the way we interact with people and our cities will change. And, yes, real estate will still matter. But so much else remains in question as this last quarter brought a sudden and dramatic end to the longest economic expansion on record.
As the nation and our region enter a temporary period of economic turbulence, it is worth revisiting the relative position of Greater Los Angeles and Southern California. Unlike previous downturns, the sudden onset of the coronavirus crisis has meant that L.A. is entering the current recession from a position of strength. Several characteristics of the region highlight its likely resilience and outperformance in the coming months.
For one, of the world’s largest metropolitan areas, Greater Los Angeles is among the most diversified economies, closely mirroring that of the nation. That means the region is relatively insulated from dramatic sector-specific swings. In periods of economic turbulence, this diversification is likely to temper both the downswings and upswings compared with markets featuring more concentrated economies — such as San Jose (technology), Houston (energy), and Orlando (hospitality). Entering the current crisis, Los Angeles’s exposure to the most highly impacted industries — accommodation & food services, retail, and wholesale trade — is only slightly higher than that of the U.S. as a whole.
Secondly, the region’s broad and deep pool of talent underpins its resilience through periods of economic uncertainty. Los Angeles is the nation’s second largest college town with 970,000 college students within the market — nearly double that of Chicago, the third largest. Furthermore, as home to Hollywood, leading think tanks, and some of the world’s most innovative companies, Southern California is one of the nation’s top destinations for highly talented individuals. In 2018, more individuals in highly-skilled occupations — namely management, business, and financial occupations; arts & media; science; and, technology — moved to the L.A. metro area than anywhere else in the U.S. Across the broader Southern California region, 94,000 of these high-talent individuals moved in, 40 percent more than the influx to the Bay Area.
The factors described above have also contributed to firmly establishing Greater Los Angeles as a favored destination for investments in commercial real estate. Simply put, investors are following the immense economic opportunity here. The broad base of investors — including a significant amount of foreign capital — has created liquidity in real estate that is matched by only a small number of gateway markets. In 2019, Los Angeles County was the most active market for real estate investment in the nation, and Real Capital Analytics ranks L.A. as the third most liquid market. The draw of this liquidity tends to be heightened in economic downturns as capital looks to safe investments, and Los Angeles stands to benefit.
In the end, it’s the economic performance that matters — and, Greater Los Angeles commercial real estate has consistently outperformed its peers. Since 2000, commercial real estate in the region has returned 9.7 percent annually, the third highest return of major metro areas, according to MSCI. The region’s strong economic fundamentals have supported stable real estate incomes, and regional supply constraints have underpinned substantial price appreciation.
As we enter into a third month of social distancing restrictions, it can be hard to imagine the bustling activity of L.A. resuming anytime soon — cars streaming down the freeway, flocking to the region’s unique confluence of creative activities. While it may take a while for the familiar Los Angeles to return, the region’s foundational strength suggests a resilience to carry it through this current crisis.
Eric Willett is the director for research and thought leadership for the Pacific Southwest region at CBRE.