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Broadly Speaking
Real estate market analysis usually requires quantitative or qualitative understanding (& prediction) of both the demand side and supply side of the space usage market relevant to some real estate decision.
The focus might be micro-level, such as a feasibility analysis for a specific site or property
Or, the focus might be more general, such as a general characterization of the supply/demand conditions in a particular space submarket.
Vacancy Rate
By definition, the vacancy rate refers to the percentage of the stock of space in the market that is not currently occupied. Vacancy Rate = Vacant Space/Total Space The vacancy rate reflects the balance between supply and demand. In most markets, it is normal for some vacancy to exist (the natural vacancy rate) even when supply and demand are in balance. When actual vacancy rises above the natural vacancy rate, rents tend to fall. When actual vacancy falls below the natural vacancy rate, rents tend to increase. Natural vacancy rate can be 6-12%
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Market Rent
By definition, market rent is the level of rents being charged on typical new leases currently being signed in the market.
asking rents may differ from effective rents Market rent is another indicator of the balance between supply and demand in a market. Can be tricky to measure because it is private information and lease terms may differ dramatically from tenant to tenant Result: Sometimes hard to get accurate rent measures usually collected via surveys.
Absorption is a demand side indicator (i.e., does not account for amount of supply available).
Gross absorption total amount of space leased, regardless of where tenants come from Net absorption net change in the amount of space occupied in a market. Positive net absorption rates: Negative net absorption rates: Demand increasing in market Demand falling in market
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Chicago Office Inventory (2004): 117 million sf Chicago Office Vacancy(2005Q1): 15.7% (highest rate since 1996) Downtown Vacancy (2005Q1) = 18.4% (21.4 million sf of space available for leasing)
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Predicted to fall further through 2005 given the high vacancy rates Concessions will increase (free month rent) Large amount of activity by tenants to extend leases (look in lower rates while they have the power).
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Chicago unemployment rate not decline (as of yet) looking for a recovery?
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Chicago Forecasts
Imminent Demand No signs of a dramatic increase in demand on the local level (no industry shift moving towards chicago) U.S. economy may be fragile oil prices/global economic uncertainty acting on a drag on U.S. economy (see recent trend in stock prices) Demand predictions moderate at best
Supply Lots of slack in the office market (vacancies high and construction continuing) Rents will not pick up for awhile (good for tenants). Still profitable to build (new construction is filling up quickly (at expense of existing properties) however rents in new construction still low). I would not develop office space in chicago at this time! Interest rates likely to rise (to fight inflation) decreases returns to owning (along with low rents and 22 high vacancies).
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Other Thoughts.
My macro assessment
Fundamentals solid not strong Oil and Inflation (has me worried) Consumers and Business (going strong) Government (too much debt) Net Exports (of no concern to me)
Business investment is most stable! Lots of capacity to expand they are hesitant given past mistakes (late 1990s) and oil/political uncertainty. Residential Property Markets They will come down (either bubble burst or supply adjusts) Increase in interest rates may quicken this effect Re-adjustment will occur slowly (it always does) Will investors adjust to/plan for a higher (normal) interest rate regime?
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