Posts Tagged ‘vacancy rates’

A Quick Story About Irrational Exuberance

Tuesday, January 14th, 2014

There is roughly 55m SF of office spec and construction nationally at a time when the vacancy rate has dipped to 15.2 percent. Seems like a lot until you consider past recessions. Robert Bach, Director of Research – Americas, for Newmark Grubb Knight Frank offers an interesting look at the building boom that caused the recession of the early 1990s to show us that we are in relatively restrained times. Construction levels today are much lower than the industry’s prior two expansion cycles. In the period leading up to the 2001 recession, office construction peaked at 3.6% of inventory while industrial peaked at 2.1%.

Here’s how Bach describes it:

The 1990-91 recession was preceded by a massive cycle of office overbuilding triggered by tax legislation in 1981 and 1986, which loosened and subsequently tightened the tax advantages available to real estate investors, setting off an ill-considered construction and lending boom that spawned the savings and loan crisis. It was the era of opulent, granite-clad towers delivered empty to the market. Texas fared worse than average due to reckless lending by many of its financial institutions compounded by an oil bust in the mid-1980s. Houston, with its lack of zoning, turned into the poster child for the boom-gone-bust and was punished accordingly by a generation of institutional investors who red-lined that market. Fast-forward to 2013 when Houston is near the top of investors’ buy lists.

The overbuilding of the 1980s haunted the commercial real estate industry, tarnishing its reputation as an asset class suitable for conservative investors while leaving a residue of concern that the industry was chronically prone to similar episodes. But lenders and developers have been more restrained since then, which has played a large role in restoring the industry’s credibility among investors. Will that restraint hold? In New York, longtime observers are wondering whether demand will catch up with projects in the pipeline. In Washington, D.C., the market has softened as a moderate construction cycle ran headlong into tenant downsizing related to government cutbacks. But these examples are like ripples from a stiff breeze on a lake compared with the tsunami of overbuilding a quarter century ago.

According to Bach 2014 will bring another surplus of demand over supply, reducing vacancy rates and pushing rents higher.

John Vivadelli: The Real Estate Perfect Storm

Tuesday, July 27th, 2010

Commercial real estate is currently experiencing a perfect storm, one that will utterly change the way corporations utilize their office space in the future.  This is the opinion of John Vivadelli, CEO and founder of AgilQuest Corporation and a well respected industry expert in the fields of alternative office environments; real estate metrics and cost management; and business continuity.

Prior to founding AgilQuest, Vivadelli was instrumental in developing IBM’s workplace management system in the 1990s to support the company’s transformational workforce mobility program, creating their “office of the future”.  This new workplace strategy resulted in reconfiguring the technology giant’s real estate footprint by shedding millions of square feet that saved hundreds of millions of dollars annually. AgilQuest provides the services and systems necessary for companies and governments to achieve similar results.

According to Vivadelli, this perfect storm is impacting both the supply and demand sides of commercial real estate.

John Vivadelli talks about the real estate perfect storm.  On the supply side, the United States has approximately 12.5 billion sq. ft. of commercial office space, which carry an estimated $1.2 to $1.4 billion in loans that will come due in the next two years. Many of these loans will not qualify under new reserve requirements.  While the average base vacancy rate is currently 17 percent nationally; that statistic does not include shadow space – square feet that are paid for but not occupied – which adds another 5 to 20% to the overall vacancy rate.  Additionally, with the upcoming implementation of FASB Rule 13, both owned and leased properties will have to be reported on corporations’ balance sheets.  Off-balance-sheet leasing will no longer be an option.

On the demand side, he sees a fundamental shift downward in real estate absorption.  The nation’s unemployment rate is approximately 10 percent, with an additional seven percent who have opted out of looking for a job. Some of these jobs will never return.  Add to that the number of workers who perform their jobs remotely and stay connected to the office via PDA, cell phone and laptop, and the average actual occupancy rate between 8 a.m. and 5 p.m. is between 30 and 50%.  That means over half of all office space across Corporate America is vacant on any given day.  Considering that an average of $60 is allocated per sq.ft., that adds up to $360 billion that companies are paying to landlords for office space that is empty and they don’t need.  This wastes 1.5 quads of energy and results in 40 million metric tons of unnecessary carbon released every year.  As companies recognize the scale of the problem, the real estate industry will see a profound shift in how we use space.

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Washington, D.C., Office Market Showing Signs of Stabilization

Wednesday, February 3rd, 2010

Washington, D.C., office vacancies shrank by 715,384 SF during the fourth quarter of 2009.Washington, D.C. office leasing is on the upswing for the first time in a year.  Not surprisingly for the District, the rise in leasing activity is driven primarily by expanding federal agencies. A study by CB Richard Ellis of fourth quarter leasing activity showed that the private sector is again leasing space they had subleased in late 2008 and early 2009, a sign that they might be on the verge of rehiring laid-off employees.  According to the report, the amount of vacant space shrank 715,384 SF during the fourth quarter.  That is a major change from the third quarter, when vacant space grew by 375,558 SF.

Vacancy rates reached a  high of 11.8 percent last year, thanks to the region’s net loss of 24,000 jobs and new office buildings coming on line.  Now, commercial real estate brokers are seeing new interest from law firms, associations and financial service firms wanting to lease space.  Some are planning for future growth, while others are taking advantage of large discounts being offered to attract new tenants.  “We have clients call and say maybe this is the time to go into the market and see what’s available,” said Ernie Jarvis, managing director of CB Richard Ellis’ Washington office.

Approximately 32 percent of commercial leases are with the federal government, an increase over the 21 percent reported in recent years.  In normal years, the government has three of the top 10 transactions in the region; that rose to eight in 2009.  These include 802,000 SF leased by the Department of Health and Human Services in Rockville, MD; 503,000 SF leased by the Drug Enforcement Administration in Pentagon City, VA; and 360,000 SF leased by the Nuclear Regulatory Commission in North Bethesda, MD.

TIC Owners Caught in the Downturn

Monday, July 13th, 2009

While the commercial real estate market waits to bottom out, dozens of smaller buyers who pooled their dollars to buy office buildings during the boom may be in worse shape than large institutional investors.  These tenants-buy-sell-exchange-photoin-common (TIC) funds, which allow smaller investors to own multiple office buildings together, are facing the same issues as giant retirement funds and institutional owners – higher vacancies, falling rental rates and frozen credit markets.

Lenders are skittish about refinancing loans due on properties with multiple owners who may be unwilling or unable to add equity or pay for buildings costs, such as commissions and management expenses.  This places fund owners in a tricky position.

TIC funds let up to 35 investors acquire properties they couldn’t afford independently.  The mechanism also lets them defer capital gains on properties they’ve sold by rolling the proceeds into another property – known as a 1031 exchange.  Careless underwriting standards and overly rosy projections failed to project that lease rates would fall while vacancy rates rose.  As a result, investors expected returns that were impossible to deliver – especially in an economic downturn that has turned a once over-priced office market into a soft one with increasing vacancies that reduce cash flow.

No Port in the Global Fiscal Storm

Wednesday, April 22nd, 2009

Shipping activity has plunged as much as one-third at U.S. ports most heavily invested in the once red-hot but now declining Asia trade. 

Freight rates from South China to Europe have slid as much as 42 percent from some ports since November, leading shipping industry authority Drewry Container Freight Rate Insight Report to speculate that this once-robust market is in freefall.titanic-sinking-7790481

As freight rates fall to record lows shipping companies are playing hardball to remain competitive, even though relatively little product is being shipped these days.  According to Drewry, container lines could see a $68 billion plunge in global revenues this year, compared with 2008 revenues of $220 billion.  Drewry notes that global all-in freight rates fell to $1,681 per 40-foot box, down from $2,098 in November.  That’s a steep $400 drop per feu (forty-foot equivalent unit) or 20 percent in just two months.

The ports of Los Angeles and Long Beach are slashing cargo rates to retain old customers and attract whatever new business they can.  Spanning 10,000 acres, these vast ports typically handle $357 billion in goods every year.  The ripple effect of this year’s overall 18.1 percent downturn is evident in California’s vital Inland Empire logistics market, where higher vacancy rates – now approaching nine percent — are translating to cheaper rents.

Conditions are slightly better at the East Coast ports of New York and New Jersey, because their diverse mix of trading partners include Asia, Europe, Latin America and South America.

Fed Chairman Bernanke Takes Steps to Restart the Economy

Friday, November 7th, 2008

Ben Bernanke has spoken.  The Fed chairman and the Federal Reserve moved recently to stimulate the economy when the policy-making committee cut the federal funds rate – the rate at which banks lend to each other – to just one percent.  This represents a half percentage point cut from the previous 1.5 percent rate.  By contrast, during the summer of 2007, this rate was 5.25 percent.

There is more good news.  Treasury rates have stabilized.  The value of the dollar and the yen are soaring.  The price of oil has fallen to less than $70 a barrel.  The New York Stock Exchange rose nearly 900 points in a single day, following the lead of markets ranging from Tokyo to Hong Kong to London.  The inflation rate is just 4.9 percent.  Unemployment is 5.7 percent – a lower proportion than was seen during previous recessions of recent decades.

And, according to NAI Global’s recent Capital Markets Update, the doomsayers who describe the current situation as “the worst economic situation ever” either are very young or have short memories.  The seemingly endless stagflation of 1973 – 1981 was far worse; so was the collapse of the savings-and-loan industry from 1989 – 1993.  The failure and September 11 wiped out more wealth when compared with the GDP.

Commercial real estate is in far better shape than the early 1990s, thanks to lower vacancy rates, higher rents and shorter construction pipelines.  Delinquency rates are virtually non-existent, though that situation could easily change.  Published in September of 2008, NAI Global’s report projects that recovery will occur within nine to 15 months.