P. | COLLIERS INTERNATIONAL
| 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
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