Office Market is Showing Signs of Life

One of the best barometers of an improving economy is reflected by a positive trend in office vacancy. As reported January 4, 2011 by the Wall Street Journal, the fourth quarter of 2010 was the first quarter since the end of 2007 that office properties in the U.S. registered an increase in occupied space (see chart below).



Other important tidbits from the article:

• Business vacated 138 million SF of office space between January 2008 and September 2010.


• The national office vacancy rate is 17.6%.


• Nationally, 2.5 million SF (net) were absorbed in the fourth quarter of 2010 after having negative absorption for the previous 11 consecutive quarters.

Portland is following the national trend, so says Gordon King of Collier's International. Mr. King is probably the closest thing we have to a "resident expert" when it comes to the Portland office market. In a recent conversation with me he had these interesting tidbits about Portland:

• Last year the Portland MSA had 600,000 SF of net absorption of office space, two-thirds of which occurred in the 4th quarter.


• The vacancy rate for the overall Portland market is in the 15% range with the downtown core being the lowest at 8% and th suburb office market the highest at around the mid- to high-20% range.


• Rents have not yet stabilized but the rate of decline is slowing. Mr. King estimates that rental rates will decline another 5% before bottoming out.


• In order to get the office vacancy rate in the 7 to 8% range, which is considered a stabilized market, 3,000,000 SF of office space would need to be absorbed. Assuming net absorption of 800,000 SF annually, it will take about 3 to 4 years to achieve a stabilized market.

The Portland office market is showing signs of improvement though it has a long way to go. However, it's just one more indication that the local economy in on the mend.

Sources: Preliminary Q4 Trends Announcement, ReisReports; Fresh Signs of Life in Office Market, Wall Street Journal, January 4, 2011; Light at the End of the Tunnel (It's Not Another Train), Ted Jones Blog, January 6, 2011.

My Crystal Ball Forecast for 2011 Commercial Real Estate

Doug Marshall, CCIM
Market Assesment


Back in December I asked my reading audience to give their opinions about what the commercial real estate market would look like in 2011.

I was pleasantly surprised by the number of people who responded. Thank you. Generally those who responded had similar thinking about the coming year as I did. So here goes:

· It’s the economy stupid! Everything hinges on what the economy ends up doing. The good news is that the economy is on the upswing. I know it doesn’t feel that way but the economy is on the rebound, albeit ever so slowly.

Believe it or not, we have had five consecutive quarters of positive growth in the GDP averaging just under 3% annually. Job growth is a different matter. There has been virtually no real improvement in the unemployment rate during this time period, currently stuck at 9.8% nationally.

The recent compromise tax bill maintaining the Bush era tax rates for another two years and lowering the payroll tax by 2 percent will have a positive impact on the economy. So I’m expecting a modest improvement in the overall economy by the end of the year.

· Rising interest rates. No one expects interest rates to stay at the current level. We are all predicting them to rise, the only question is how much. If they rise gradually over time we’ll be OK. If they rise dramatically over a short period of time, like they did from early October through mid December of 2010, it will shut down our industry until real estate prices adjust to the higher rates.

The consensus is that rates will rise slowly. Let’s hope we’re right. The alternative would be disastrous

· Will there be more lenders in the market? Yes. Absolutely. And their rates will be more competitive too. I am beginning to see this especially for apartment financing. I get calls from lenders saying that they plan to dramatically increase their loan volume in 2011 and asking what they need to do with their rates and terms to get more deals.

I also see a few lenders getting back in the retail side of the market. Lenders are showing more interest but underwriting will continue to be difficult. I think there will be more lenders in the market as their balance sheets improve. We are not over the banking crisis but we are beginning to see a light at the end of the tunnel.

· What property types will show increased sales in 2011 over the prior year? Everyone agrees there will be increased sales transactions in 2011. That’s probably because to be in commercial real estate you have to be a cockeyed optimist!

However there wasn’t a consensus as to which property types will show the most improvement. This is my take: I believe all property types except for land and hotels will show improved sales activity this year.

However for most property types, office, retail and industrial, the properties that are distressed with blood in the water will be in demand and those that are strong credit tenant properties will also be in demand. Everything in between will likely have very little sales activity.

Lenders have shown little appetite for properties that have any “hair” on them whatsoever, i.e., high vacancy, rental rates trending down, short lease terms, etc. Apartments, being the exception will do fine regardless of size, condition, and location as there are several lenders wanting to finance apartments with more recently coming into the market.

· Where are vacancy rates, concessions and rental rates heading? Improvement in vacancy rates, concessions and rental rates will be dependent on job growth, especially for office and industrial properties. Apartments and retail are less dependent on job growth but they too would show improved demand if the unemployment rate were to dip a bit.

The unemployment rates for Oregon and Washington, 10.6% and 8.9% respectively are not expected to improve significantly this year. At best I think we will see modest improvement in the unemployment rate, but probably not enough to affect real estate values.

· What will cap rates do? I think rising interest rates will stop any fall we might have seen in cap rates due to improving fundamentals and demand. They will counterbalance one another.

I believe it is possible that the top of the line properties may see some improvement in cap rates but all other properties will see either have a flat or slightly rising cap rate during the year.

A special thanks to Mike Baron, Mark Barry, Charles Conrow, Tom Davis, Alan Evans, Tom Hanacek, Cliff Hockley, Steve Morris, Marc Rogers, Dan Rodriguez, and Christian Trandum who gave valuable input for this article.