HIGHLIGHTS
NORTH AMERICA
WWW.COLLIERS.COM
Q1 2012 | OFFICE
K.C. CONWAY
EMD | Market Analytics
The Bottom Line
•
A national rebalancing o business growth rom FIRE (Finance, Insurance and Real Estate) to ICEE(Intellectual Capital, Energy and Education) has shited oce demand to cities with ICEE industryconcentrations.
•
An oncoming wave o maturing debt will soon change the volume and tenor o sales transactions.
•
National oce absorption remains steady, but a ull robust recovery is still in the uture.
•
Oce construction is still low, with only . MSF o new supply delivered in Q .
Measured Rebalancing
We oten use the term “measured rebalancing” to describe the current state o the U.S. oce propertymarket. This reers to the long process o working through an oversupply o oce space according tomaterially dierent demand drivers. The market must recalculate the amount o oce space required,and recalibrate in areas that space demand has shited.
MARKET INDICATORS
Relative to prior period
U.S. OFFICE MARKET
SUMMARY STATISTICS, Q
Ofce Demand Steady on Strength oICEE Industries
QQ*VACANCYNET ABSORPTIONCONSTRUCTIONRENTAL RATE
*Projected
Vacancy Rate:
.%
Change rom Q :
–.%
Absorption:
.
Million Square FeetNew Construction:
.
Million Square FeetUnder Construction:
Million Square FeetAsking Rents Per Square Foot(Change rom Q ):Downtown Class A:
$. (+.%)
Suburban Class A:
$. (+.%)
15.3% vac.15.3% vac.
Sq. Ft. By Region
2.0000001.00000
0
2.000000Total_OSF-Vacant_OSFVacant_OSF
Absorption Per Market
Q4 '11 - Q1 '12
1,200,000120,000-120,000-1,200,0004 million2 million400,000Occupied Sq. Ft.Vacant Sq. Ft.
16.3% vac.15.3% vac.15.3% vac.
13.5% vac.
6.7% vac.
NORTH AMERICAN OFFICE VACANCY, INVENTORY AND ABSORPTION—Q1
P. | COLLIERS INTERNATIONAL
HIGHLIGHTS
| Q1 2012 | OFFICE | NORTH AMERICA
“Oce space demand is now driven by techindustries in ‘Knowledge Gateway’ markets,such as Austin, Boston and Silicon Valley; andenergy corridor markets extending north romHouston into Canada.”
RaleighWashingtonSilicon ValleyAustinDenverHoustonCalgaryTorontoSeattleBaltimore
ICEE Markets on FireFIRE Markets on Ice
•
Houston
and
Calgary
were the only two markets with over 1 millionsquare feet (MSF) of absorption in Q1 2012.
•
Toronto
boasted the lowest vacancy (5.3 percent) of any market withover 10 MSF of inventory.
•
Seattle
ranks 5th highest in absorption, with a vacancy rate below13 percent.
•
Silicon Valley
was in the top 10 US markets for decreased vacancyrate.
•
Baltimore
and
Washington DC
each boast a vacancy rate below 15percent.
•
Raleigh
boasts a vacancy rate below 12.5 percent and saw positiveabsorption for the quarter.
•
Atlanta
and
Los Angeles
were the only two metros with inventoriesover 200 million SF and vacancies over 17.5 percent.
•
Los Angeles
and
Orange County
each had vacancy rates over 18percent.
•
Central New Jersey
showed the worst absorption of the top 20oce markets.
•
Chicago
saw negative absorption and 15 percent vacancy.
•
West Palm Beach
experienced negative absorption and 19.5 percentvacancy.
•
Midtown South Manhattan
saw negative absorption in Q1 2012.
•
Phoenix
suered from negative absorption and a vacancy rate over22 percent.
Prior to the housing and nancial crises, oce demand was aligned withgrowth in nancial services and the over-heated housing markets. Newbank charters, growing numbers o subprime lenders and unparalleleddemand or residential and commercial mortgage-backed securities allpropelled a need or more oce space in markets with high concentrationso these industries, such as Chicago, Los Angeles and New York. As thesubsequent recession and recovery has unolded, nancial and real estatebusinesses are no longer growing in the way they once were. Now, a newset o demand drivers has taken hold.
ICEE Markets on Fire
One o the key dierences between improving andlagging oce markets is the type o industry concentrations each has.Oce space demand is now driven by tech industries in ‘KnowledgeGateway’ markets, such as Austin, Boston and Silicon Valley; and energycorridor markets extending north rom Houston into Canada. As somemanuacturing returns to the U.S. rom Asia and India, oce demand isalso growing in inland manuacturing markets in the Midwest and portmarkets along the Gul Coast, South Florida and the Mid-Atlantic States—especially Miami, Virginia and North Carolina.We have chosen two categories to distinguish between leading and laggingindustries: FIRE and ICEE.
•
Finance, Insurance and Real Estate
(FIRE) markets are seeing stalledgrowth in demand or oce space.
•
Intellectual Capital, Energy and Education
(ICEE) markets eature con-centrations in a combination o technology, higher education and energyindustries. These growing industries are pushing up demand or ocespace in select markets, especially in Class A buildings.
Oce demand has shited away rom FIRE and toward ICEE, thereby a-voring cities with higher concentrations o ICEE industries.
Rents and Absorption Showed Improvement over Last Year
The U.S. hasseen a sustained modest improvement in vacancy and absorption in recentquarters. However, a more robust recovery in oce demand—such as isoccurring in multiamily and industrial real estate—remains elusive.Uncertainties in the economy are keeping businesses rom hiring and leas-ing oces.For Q1 2012, approximately 14.9 percent o the inventory that Collierstracks was vacant; an improvement o 8 basis points rom year-end 2011.With only 7.5 MSF o new supply delivered to these 81 markets in Q1, netabsorption was a positive 8.1 MSF. With this amount o vacant space, andanemic oce-related job growth, oce rents improved just marginally inthe 36 CBD markets that reported rent increases. The other 36 CBD mar-kets registered fat or declining rents. Thirty-two Suburban markets re-ported rent growth, while 37 suburban markets reported fat or decliningquarter-over-quarter rents. Class A CBD rents improved rom $40.73 persquare oot to $40.96 per square oot. Class A Suburban rents increasedrom $25.86 to $26.14 per square oot.
SELECT INTELLECTUAL CAPITAL, ENERGY AND EDUCATION (ICEE) CITIES
P. | COLLIERS INTERNATIONAL
HIGHLIGHTS
| Q1 2012 | OFFICE | NORTH AMERICA
Slow Recovery Makes Businesses Hesitate to Expand
Owners and inves-tors held out the hope at the onset o 2012 that the rebound in multiamilyand industrial real estate demand would soon spill over to the oce sector.This hope was rooted in a number o promising economic metrics: inMarch, it was conrmed that GDP expanded during the nal quarter o 2011by 3 percent; the unemployment rate declined to 8.3 percent; and the labormarket delivered 227,000 new jobs in February. However, the start o2012 now seems eerily similar to that o 2011, which began with positiveeconomic indicators that zzled out as the year progressed. Now a morerobust economic recovery remains elusive amidst uncertainties stemmingrom upcoming elections and concerns about the impact o the EuropeanCrisis on the U.S. economy. Businesses and investors are anxious aboutmaking long-term investment decisions.
Pockets o Strength
While a robust recovery remains elusive at the nationallevel, macro market averages tell just a part o the oce property sectorstory. A more detailed look shows a market split into areas o strong andweak demand. In many cases, the shit in oce demand drivers rom FIRE toICEE has been the engine o growth or these stand-out markets.
•
The largest markets are experiencing more robust ofce demand, withICEE as a major driver.
More than hal o the total net absorption in Q1came rom the 21 largest markets. Approximately 2.6 MSF o this net ab-sorption (24 percent o 10.8 MSF North American total.) came rom ICEEmarkets ranked among the 21 largest metros.
•
In terms o occupancy rates, the largest U.S. markets are in line with theoverall U.S. rate.
The 10 largest markets (Midtown Manhattan, MidtownManhattan South, Washington, D.C., Chicago, Dallas, Atlanta, Los Angeles,Houston, Boston and Philadelphia) have a vacancy rate o around 15percent.
•
The next ten largest markets show a lower vacancy rate, thanks to thesupport o three ICEE markets.
The metros ranked 11th to 2nd in size(Toronto, Denver, Northern New Jersey, Detroit, Phoenix, Cleveland, Seattle,Pittsburgh, Minneapolis, Central New Jersey, Charlotte and Baltimore) havean average vacancy rate o 14.1 percent, 85 basis points lower than the aver-age or the U.S.
•
The highest vacancies are concentrated in Caliornia and the Northeast.
Approximately one-third o the markets have an average vacancy rate above15 percent. O these 27 markets, seven are located in Caliornia and ve arelocated in the Northeast, where FIRE is the primary oce demand driver.
•
ICEE drives much o major market absorption.
Only two markets hadin excess o 1 MSF o net absorption, and both were ICEE markets:Houston and Calgary. Only eight metros had net oce absorption in ex-cess o 500,000 square eet (Calgary, Houston, Toronto, Seattle, Atlanta,NY – Midtown Manhattan, NY – Downtown Manhattan, and Philadelphia),and hal o these were ICEE markets.
•
Investors should look beyond the core, as secondary markets showsome strength, driven by ICEE, manuacturing and agriculture.
Only 19o the 60 markets that contain less than 100 MSF o inventory saw nega-tive absorption. This trend suggests that, despite the strategy o institu-tional capital which pursues properties in core markets with at least 100MSF o oce inventory, investors should begin to look beyond the 7/11s(the core 11 markets in 7 states). Oce demand in secondary marketssuch as Raleigh and the Silicon Valley is being driven by ICEE, but beyondthese markets much o the demand is being ueled by a more traditionalset o drivers. A boom in agriculture and manuacturing growth is stimu-lating some oce demand in markets such as Boise, Charlotte, GrandRapids, Indianapolis, Louisville and Nashville.
High Oce CMBS Delinquencies Set the Stage
The volume and tenor otransaction activity is set to change, as the wave o maturing oce debtcreeps into ocus. The news remains disconcerting. The delinquency rateor U.S. commercial real estate loans in CMBS increased another 12 basispoints in April to 9.3 percent, as reported by TREPP. The value o delin-quent loans is now $58.1 billion. The oce property delinquency rate wasup 85 basis points, setting a new all-time high o 10.23 percent.
“In many cases, the shit in oce demanddrivers rom FIRE to ICEE has been the engineo growth or these stand-out markets.”
US GDP PRE-/ FINANCIAL CRISIS THROUGH Q
Q 2 Q 3 Q 4 Q 1 2 0 1 1 Q 2 Q 3 Q 4 Q 3 Q 1 2 0 0 9 Q 2 Q 2 Q 4 Q 3 Q 1 2 0 0 8 Q 1 2 0 0 7 Q 2 Q 3 Q 4 Q 1 2 0 1 0 Q 4 Q 1 2 0 1 2
-8-10-6-4-20246
1.831.81.32.32.53.83.93.81.71.31.733.6-6.7-8.9-3.7-1.8-0.70.40.5
Source: Trepp
DELINQUENCY RATES BY PROPERTY TYPE
APR - MAR - FEB - MO MO YR
Industrial12.36 12.54 12.37 12.14 11.59 10.76Lodging10.55 10.63 11.05 12.09 14.12 15.45Multiamily15.18 15.39 14.65 15.39 16.73 16.77Oce10.23 9.41 9.04 8.90 8.95 7.20Retail7.98 8.24 8.00 7.88 7.61 8.15Overall9.809.689.379.529.779.65
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