CoStar: In a Surprise, Office Market Posts Unexpetedly Good Results

By Mark Hershmeyer


Whether a Bounce or Rebound, U.S. Markets See Positive Absorption in Fourth Quarter, Set


Stage for Potential Recovery

Even though the overall number of U.S. jobs continued to disappear through December of last year, the
U.S. office market unexpectedly posted positive net absorption for the quarter. The most likely explanation is that jobs in the office sector increased. According to federal government jobs data, office sector employment increased for the fourth consecutive month in December, increasing by 48,000 jobs. Even the financial sector posted its first increase in employment since July 2007 adding 4,000 jobs in December. Since the end of August, office-using employment is up 154,000 jobs. "This is simply the most important news in the office market in the last 18 months and that has set the potential for recovery in the office markets." said Andrew C. Florance, founder, director, president and CEO of CoStar Group Inc. in his surprisingly upbeat quarterly assessment of the U.S. office market this past week.

CoStar data shows a concurrent increase in total leasing activity last year. Gross leasing activity increased from about 60 million square feet of activity in the first quarter of 2009 to what is expected to be more than 90 million square feet in the fourth quarter.

The U.S. office markets posted about 6 million square feet of positive net absorption, Florance reported in CoStar's quarterly State of the U.S. Office Markets webinar. And the return to positive absorption came about two quarters earlier than expected due in part to the better than expected labor numbers, Florance added.

Florance stopped short of calling the results a rebound and referred to it as "a cessation of bad news" and told listeners not to expect a return to big gains in net absorption anytime too soon. In its 2010 Predictions presented this week, CoStar subsidiary PPR (Property and Portfolio Research), echoed that theme and warned that the market could still see negative net absorption.

"While the economy appears to be stabilizing, it will take a while for this to flow through to the office market," Josh Scoville, director of strategic research and editor of the report wrote. "Due to the lag between GDP growth and hiring, this property type has the longest lag between economic improvements and an increase in demand. PPR does not anticipate a resumption of job growth at the national level until the second half of 2010, and the recovery will be tepid at first. Although things should start looking up in the latter half, expect net negative absorption in 2010."

The modest fourth quarter bump in absorption helped the national vacancy to level at about 13.1%, Florance said. However, the total office space availability rate was still increasing and was approaching almost 18%. Florance said this additional supply of under-utilized space is going to mute any dramatic increase in positive absorption in the short-term.

Another downside CoStar reported in its analysis is that office rents will continue to fall even as demand might be stabilizing. This was a rough year for office landlords, PPR reported, as asking rents declined by nearly 10% on average. "While landlords in some markets (such as New York, San Francisco, and Orange County) have been quick to lower rents, most have been holding out on face rents as much as possible and relying more on concessions to get tenants in the door," PPR reported. "But this will not last forever, and as office owners come to terms with reality in 2010, asking rents will be slashed. As distressed assets are scooped up, new owners with lower debt obligations will be able to undercut the competition, pulling down market rents."

While nationally office markets showed positive net absorption, regionally, there were big differences. The Northeast states lead the nation with about 4.8 million square feet of positive net absorption. New York City posted 1.6 million square feet; Philadelphia 900,000 square feet; Northern New Jersey, 600,000 square feet; Long Island, a half of million.

Across the country on the West Coast, though, Orange County California posted negative net absorption of 1 million square feet; and San Francisco, 900,000 square feet. Washington, Oregon and California combined had negative net absorption of about 2.1 million square feet.

Atlanta with negative net absorption of 500,000 square feet brought down the Southeast's numbers. The Southeast states posted about 11,000 square feet of negative net absorption in the fourth quarter; that compares to positive net absorption of more than 5 million square feet in the third quarter.

Minneapolis with 400,000 square feet of positive net absorption carried the Upper Midwest to a net gain of 436,000 square feet; and the Mountain West states showed 778,000 square feet of net absorption, led by Denver with 600,000 square feet of positive net absorption.

Washington, DC, with 900,000 square feet of positive net absorption carried the Mid-Atlantic region and boosted positive net absorption in that region to 1.35 million square feet.

The Midwest states had a net loss in occupancy of 527,000 square feet. Detroit alone posted a negative 1.6 million square feet of net absorption.

Mr. Landlord, What keeps you up at night?

Is it the leases on your building expiring? Is it wondering if your rates are in line with the current market or are you leaving money on the table? How about any governmental actions in the works that could redirect traffic away from your building, make it hard for tenants or customers to get to work? How about the current debt levels that are putting you under water? What expenses could you be writing off that are costing you thousands come April 1? What if you agreed to some lease terms that turned out not to be so favorable and the lease doesn't expire for another couple years?

If any of these concern you, then you are not alone. These questions along with hundreds of other questions are everyday concerns of the commercial property owner and there is a place to start answering those questions.

If you haven't befriended a commercial real estate broker, it should be on your New Year's goal sheet.  There are several industries that are effected by the brokers recommendation for the myriad of services that need to be performed to maintain commercial real estate. Industries that benefit from good relationships with brokers are: general contractors, HVAC repairs, handywork, plumbers, alarm companies, lighting and electrical contractors, drywaller and plaster contractors, elevator repairmen, boiler engineers, landscaping companies, property managers, leasing agents, insurance agents, financial consultants, accountants, closing companies, title companies, abstract compancies, etc. to name a few.

The owners of the companies in each of the above named industries know that the broker has the buyer/seller/tenant or landlord's ear when it comes to property advice. The good CRE Broker knows that his or her role should include relationships with each of these industries and be quick with a recommendation that can help the buyer/seller/tenant or landlord. In almost every situation, the expertise and services performed from a good commercial real estate broker will help save thousands.

If you need ideas on how to improve your property situation, feel free to contact Neil Dailey at McGraw Commercial Properties at 918-853-7337.

New Retail Designs?

For many in Middle America, there seems to be a trend to the same ol' same ol' retail developments that keep popping up. Tan stucco exteriors and a few elevation changes with simple interiors for the most part sums up all the basic retail developments in the area. Not surprising, it's affordable, looks clean and is easy to attract tenants and shoppers.

However, there is a whole other world out there in retail architecture, so much so that there is an award for the best in retail architecture. It's called the SADI (Superior Achievement in Design and Imaging) Award. It recognizes outstanding achievement in creating beautiful and successful retail environments.

For more info on the article discussing the award and it's history, click here. 

To see the winners of this year's SADI Award, click here for 1st place, 2nd place & 3rd.

For expert advice on buying or selling commercial property, contact Neil Dailey of McGraw Commercial Properties for your next commercial real estate transaction. Direct line: 918-853-7337.

Rattled Retail

Today, another gloomy story about Office Depot is announced.  According to Bloomberg, Office Depot, Inc said it will close almost 10 percent of its North American stores and cut 2,200 jobs or 4.5 % of its workforce as the demand for business furniture has fallen during the US recession. On the bright-side, shares jumped 11 % on the news.

Office Depot currently operates 1275 stores in North America and this number will be reduced to 1163. New store openings next year will be limited to 20 stores, which will reduce capital spending and increase cash flows by $70 million.

For more information on the story, click here.

If you are looking to buy, sell or lease commercial property, please contact Neil T. Dailey of McGraw Commercial Properties for expert advice on your next transaction. Neil can be reached at 918-853-7337.

Going For The Green

In the latest Realtors Commercial Alliance (RCA) report, there is some astounding information on the growth of green buildings and the effect of commercial buildings on the environment. For example, the article states that buildings are a major contributor to climate change-emitting 39% of U.S. CO2 emissions (18% from commercial buildings), consuming 71% of the country's electricity, and producing 65% of its waste according to the U.S. Green Building Council (USGBC.)

Not only that, the emissions are expected to grow 1.8% over the next two decades.

In addition to some staggering statistics, there are a few eye opening quotes such as this one from Joseph Scarpa, a broker associate with Legend Properties who says, "Green is making a major push forward. If you're putting a property in the ground today that isn't green, it will be functionally obsolete before it's finished.

Here is a link to the article.

Check out these other organizations for more Green Initiatives:

Building Owners and Managers's Association, California Sustainability Alliance, Ecobroker, Energy Star, U.S. Green Buildings Council.

If you would like to talk about buying, selling or leasing commercial property, please contact Neil Dailey at McGraw Commercial Properties, 918-853-7337 or ndailey@mcgrawok.com.

New Hotel Planned in Tulsa

According to a report on CoStar.com today, Sunny Hotels, LLC acquired 4.4 acres at 807 W. 71st St. in Tulsa, OK from James Geisinger for $1.8 Million, or about $410,000 an acres. Click here for the full article.

For more news and information on Tulsa's commercial real estate market, contact Neil Dailey at McGraw Commercial Properties at 918-853-7337.

Commercial Real Estate Loan Portfolios holding up in weak economy

There has been a great article written about the commercial real estate loan portfolios held by banks and other lending institutions. In the midst of all the doom and gloom around the real estate industry, it's necessary to spotlight the good news so you are informed on all sides of the issues. Click here for a link to the article posted on CoStar today.

For more news and information on commercial real estate, or for general commercial real estate questions, call Neil Dailey of McGraw Commercial Properties at 918-853-7337.

Industry Stats

The latest industry stats have been released for the national retail real estate sector. First quarter of 2008 shows a sales volume of only $49 billion, down $100 billion from Q1 of 2007 say Real Capital Analytics in Retail Traffic Magazine. Most blame the economy as the reason for the massive pullback by developers and retailers alike.

In regards to rental rates, New York stands alone as the highest per square foot rate for in-line retail space at $133/psf. Next highest is San Francisco at $70/psf. On the home front in Tulsa, average rates are hovering around $20/psf.

For more commercial real estate news and information, call Neil Dailey of McGraw Realtors at 918-853-7337 or email at ndailey@mcgrawok.com.