Los Angeles County has proved a reliable bulwark against the rising delinquencies seen in CMBS backed by U.S. industrial properties during the past several years, according to Standard & Poor's research.

As of late 2003, California comprised more than one-fourth of industrial loans and about $4 billion based on allocated loan balance, yet accounted for only 4.5% of industrial loan delinquencies (approximately $9 million in delinquencies). None of these delinquencies were tied to Los Angeles County loans, which make up roughly one-fourth, or $1 billion, of California's industrial loans.

In general, the industrial sector has been hit hard by the lagging economy, as measured by GDP, and the average vacancy rate for the sector exceeded 10% as of the third quarter 2003. The total dollar amount of CMBS industrial loan delinquencies in the fourth quarter rose to $195.4 million, compared with $90 million at the start of 2003.

The Port of Los Angeles, located within the borders of Los Angeles County, helps bolster demand for industrial space in the area, as does L.A.'s status as the largest U.S county in terms of manufacturing output. At 6.5%, third quarter vacancies in Los Angeles County were significantly below the national average. Analysts predict that the county will continue to beat the national average.

Meanwhile, with GDP picking up - it grew by 3.1% in 2003 compared with an anemic .5% in 2002 - S&P analysts expect fundamentals for the overall sector to improve. However, a broader shift in demand fundamentals is likely to offset the positive impact somewhat. Cost-cutting initiatives such as cross-border outsourcing and better methods of controlling inventory will likely hold down demand, analysts predict.

Yet robust home sales have continued to drive better-than-expected retail sales, thereby fueling moderate demand for industrial space for warehousing and distribution.


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