Energy Crisis

Ironically, a hiccup in the Golden State's economy has kept demand for energy in check. But real estate professionals agree that businesses and manufacturing companies may be inclined to exit California if energy costs once again escalate and capacity diminishes.

“What has happened this summer has been much less than what was expected. There have been very few outages within the state [of California],” said Dan Hard, manager of energy procurement for the Ernst & Young Energy Group in Phoenix. According to Hard, a couple of factors, including the relatively mild weather in the West and the investigations into market manipulation behavior of owners of pipelines and power plants waged by the State of California and the Federal Energy Regulatory Commission, have contributed to more consistent energy supplies and prices.

“Because of this scrutiny, generators, owners of the pipelines and power plants are much more scrupulous this year than perhaps last year,” Hard said. Power plant owners aren't able to work the system by withholding power and driving up prices in peak demand periods, he explained. “Supply has been adequate, we've had mild weather and the economy in California has slowed considerably.”

Office holds steady

With the slowing economy, demand for energy has decreased. With less demand, the grid hasn't been as taxed, and there have been relatively few blackouts. Greg May, senior vice president of Transwestern Commercial Services, a real estate services firm in Orange County, Calif., experienced one blackout during work hours. He could see that the building across the street was lit and the electricity was still functioning. Regardless of the occasional inconvenience, May maintains an upbeat attitude and said that energy issues aren't affecting the real estate market.

“Frankly, I haven't seen it. You lease office space because your employees live here,” May explained. “The labor pool is so rich with well-educated employees. You really can't move your office.”

Likewise, Rob Mitchell, a vice president and office broker at Commercial Brokerage in Anaheim, Calif., said the office market remains robust. “In reference to the office market, energy has affected it to a certain extent but hasn't had a huge impact.”

Mitchell said he thinks the energy issue will be resolved before it causes a mass exodus from California. “When the energy issue first broke, it was obviously at the top of everybody's list,” he said. “The reaction to the hype hasn't been that substantial. People are still concerned about it, but it's not a deal killer from the standpoint of when you're trying to negotiate a sale or lease.”

Industrial hangs on

In the industrial sector, manufacturers are taking precautionary measures. “They [manufacturers] are definitely evaluating alternative power sources and backup sources,” said Mike Hefner, a senior vice president and industrial broker at Commercial Brokerage.

One of the selling points that is using for its industrial facilities in Anaheim, Calif., is the fact that Anaheim owns and operates its own utility company, which translates into lower electrical costs for tenants.

Hefner said users aren't moving their operations because of electrical costs, but the cost of energy is becoming more of a concern. On the other hand, he added, some property transactions have fallen apart because of economic concerns not directly related to energy.

According to Hefner, energy and economic conditions are topping the list of industrial owners and managers. “The property owners/managers are really scrutinizing any cost of service and, more importantly, how to provide the service in the event of an interruption,” he said. “The impact of rising utility costs on ownership, property and occupants of property is real.”

Although tenants are not fleeing California just yet, the energy issue continues to smolder. It could start burning in full force when the economy springs back. “If anything, the slowdown in the economy is dampening the demand in commercial and industrial segments for power,” Hard said. “Production is reduced and expansions have been deferred, but at some point in the not too distant future production levels will increase and building owners will be looking to put structures up and the issues are going to re-emerge.”

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