Western Market Update - Optimism Taking Root (Spring 2004)

Western Market Update—
Optimism Taking Root
by
Hugh F. Kelly,
CRE
Hugh F. Kelly, CRE,
Brooklyn, New York,
an economics consultant and a professor in
New York University’s master’s degree
in real estate program,
was formerly with
Landauer Real Estate
Consultants. Hugh
has worked on the
Society’s Comparative Statistics project
for more than 12 years.
“Indicators show improvement
in the Pacific and
Mountain regions.”
Start spreading the news. Optimism is taking
root in the office and industrial property
markets in the western United States, and
both statistical and sentiment indicators of
improvement are beginning to dominate at
the start of 2004. In late February, more than
30 SIORs in the Pacific and Mountain regions
filed update reports to the recently published
SIOR 2004 Comparative Statistics edition, and
the tone is decidedly upbeat.
As always, it makes sense to start with
the economy. Our questionnaire asked the
Society’s professionals to rank five factors in
order of importance in their market areas. All
the factors, of course, are interrelated, but
assessing their order of priority gives us a
good barometer of the immediacy of impact
on the real estate markets, as assessed by
SIORs experienced operatives.
How Western SIORs Rate
Factors in Market Recovery
140
Scoring Matrix for Ranking Economic Factors
Factor
Ranked Ranked Ranked
First
Second Third
17
11
0
Job
Growth
Ranked
Fifth
1
Ranked
Fourth
2
Interest
Rates
3
8
13
3
4
GDP
Growth
9
4
6
4
8
Corporate
Profits
3
3
7
13
5
Consumer
Spending
0
5
4
9
13
Holliday Fenoglio Fowler, L.P.
GDP and Non-Farm Employment
Year-Over-Year % Change
8%
6%
Points Out of Potential 155
4%
120
2%
100
0%
80
90
19
-2%
60
40
91
19
92
19
93
19
94
19
95
19
GDP
96
19
97
19
98
19
99
19
00
20
Non-Farm Employment
01
20
02
20
03
20
Sources: U.S. Bureau of Economic Analysis; U.S. Dept. of Labor Holliday Fenoglio Fowler, L.P.
20
0
four points to the next, down to one point for
the lowest-ranked factor. Since 31 market
questionnaires were returned, the maximum
potential score was 155 points. For further
detail about the answers, a table showing the
scoring matrix is also presented.
Jobs
Int. Rates
GDP
Profits
Consumers
The five factors, as evaluated by the survey respondents, provide some thought-provoking results. The graph, “How Western
SIORs Rate Factors in Market Recovery,”
shows the overall results. The factors rated
were as follows: job growth, interest rates,
GDP growth, corporate profits, and consumer expenditures. A simple scoring system
assigned five points to the top-rated answer,
For most real estate observers, the ranking of employment change as the top variable is not a big surprise, at least on the surface. Job change received 134 of the potential
155-point maximum, far above any other
variable. Twenty-eight of the 31 respondents
listed job growth as either the number one or
number two choice. But, given the “jobless
recovery” so much discussed in the popular
and business press, how can this ranking be
reconciled with the generally positive tone of
our Western commentators? After all, the national
employment figures (see the graph “GDP and Non-Farm
Employment”) ended the year 2003 just about where they
were at the end of 2002, and that was the same as at the
end of 2001. This deep into an official “recovery,” we are
still 2.8 million jobs below the previous peak. So, why are
our respondents smiling?
12-Month Employment Change by State, December 2003
0.2%
0.6%
0.0%
1.2%
0.2%
0.6%
0.0%
1.3%
4.0%
0.2%
0.9%
0.9%
0.2%
0.6%
2.0%
1.2%
0.7%
0.5%
0.5%
0.1%
0.0%
0.1%
1.8%
0.2%
1.2%0.6% 0.3%0.6%0.9%
0.1%
0.0%
0.8%
0.5%
0.2%
0.4%
0.5%
0.3%
1.8%
0.3%
2.3%
1.7%
NH 0.5%
MA -1.3%
RI 0.2%
CT -1.0%
NJ 0.9%
DE -0.2%
MD - 0.8%
DC 1.0%
VT 0.7%
Growth Rate
less than -2%
-2% to -1%
1.7%
-0.9% to 0.0%
0.0% to 1.5%
1.5% to 3%
3% +
Source: U.S. Department of Labor
for yearFenoglio
ending Dec. 2003.
Holliday
Fowler,
L.P.
A look at the map showing state-by-state employment
change for 12 months ending December 2003 provides a
clue. Of the 13 states included in the Mountain and
Pacific regions of the country, 10 are showing job
additions over the course of the year. Nevada leads the
nation, with a four percent growth rate. New Mexico
boasts a two percent gain in jobs while Hawaii reports a
1.8 percent increase. Oregon is close to break-even with a
net loss of 600 jobs in 2003, statistically insignificant
against its 1.6 million-employment base. And even
California is close to turning the corner, with a negative
0.2 percent rate of change. In the Inland Empire, SIOR
Thomas P. Pierik, SIOR, of Lee and
Associates, asks, “What recession?” While
pockets of the Southeast, the Mid-Atlantic,
and even New England are stepping into
the plus column on jobs, our observation a
year ago that this recovery would be rising
in the West is proving to be right on target.
SIORs give due credit to Federal
Reserve Chairman Alan Greenspan for orchestrating the
low interest rate environment that has supported recovery. Ample liquidity and a low cost of capital have helped
sustain investment values in the real estate markets, even
during a difficult period for rents and vacancy. (See the
accompanying article in this issue on the rational exuberance in commercial property investment.)
Although pronouncements from the Fed are sometimes Delphic in their obscurity, the behavior of the central bank has been very straightforward: err on the side of
ease until it is absolutely certain that sustainable job
growth is in place. The February survey of the National
Interest Rates and Inflation
10%
9%
CPI
10-Year
8%
7%
3-month
6%
5%
4%
3%
2%
1%
0%
19
90
19
92
19
94
19
96
19
Sources: U.S. Dept. of the Treasury; U.S. Census Bureau
98
20
00
20
02
Holliday Fenoglio Fowler, L.P.
Association of Business Economists forecasts a flattening
yield curve this year, assuming that the Fed will push
rates back up toward their historical average. This consensus appears to be overly conventional in its “reversion
to the mean” outlook. There could actually be a greater
tendency for the yield curve to get steeper, as the Fed
continues to stimulate or maintain at least a “no change
during election years” position on the short end of maturities. Meanwhile, the market could demand higher rates
at the long end. This is likely, reflecting the out-of-control
Federal budget deficit and the prospects of worsening
Federal debt if tax cuts are made permanent and entitlement payments for Social Security and Medicare increase
substantially toward the end of the decade. Real estate
industry professionals will be watching carefully in any
case, as interest rate movements scored 96 of a possible
155 points, to rank second to employment in economic
forces affecting the property markets.
SIORs rate overall economic growth, as measured by
real GDP, nearly on a par with interest rates in shaping
market conditions. GDP received 95 points in our poll,
nearly a dead heat with interest rates. The exceptional
level of growth in the second half of 2003, when third
quarter GDP soared at an 8.2 percent annual rate, followed by the fourth quarter’s four percent gain, clearly
contributed to the rising confidence revealed in our survey. Even though real estate markets are local, the businesses that make up the tenant base sell products and
services on a regional, national, and international basis.
When the national economy is in expansion, growth
opportunities for these tenants increase, creating the
demand for more space.
Corporate Profits and Consumer
Spending Have Less Immediate
Impact
Corporate profitability sets the stage for investment and
hiring, and 2003 was an excellent year for profit growth
across the United States. After-tax corporate profits rose
27.4 percent in the 12 months ending in the third quarter
2003 (the most recent data available in the National
Income and Products Accounts from the government).
SIORs look to corporate profits as a supporting, but not
dominant factor, in the influences shaping real estate
markets. Corporate profitability ranked fourth of the five
factors we examined, with a total score of 79. Only six
respondents ranked profitability in first or second place,
while 18 listed this variable fourth or fifth on their lists.
Economists and the business press watch the behavior
of consumers with the same intensity that the media give
to Punxsutawney Phil on Groundhog Day. And, according to our respondents, consumers are fully as relevant to
their market outlook as Phil is to meteorology. Consumer
expenditure patterns scored a mere 63 points in our survey of market variables, with no first place rankings and
13 fifth place ratings. Quite a comedown for the statistic
that represents 70 percent of GDP! Nevertheless, this low
rating provides some shield against over-reaction to the
ever-volatile Consumer Confidence Index published by
The Conference Board, which stood at an 87.4 reading in
February 2003. A long-run view of this Index suggests
that it lags economic trends rather substantially. For
instance, the Confidence Index did not rise above 100
until late 1995 in its recovery from the recession of 1991.
With this economic background in place, let’s see
what SIOR professionals have to say about the conditions
and outlook for the Western markets at the start of 2004.
Cyclical Turn in the Markets
Becoming Increasingly Evident
Start with a threshold question: “Is the recession really
over in your market?” The employment change map is a
good guide to the responses. In Nevada, for example, the
comments are enthusiastic. Las Vegas SIOR members
Bradley G. Peterson, SIOR, and Randy E. Broadhead,
CCIM, SIOR, of CB Richard Ellis, assert unequivocally,
“The recession is over and our office market is in full
recovery. Net absorption was 1.2 million square feet in
2003, which is close to our 1.5 million record in 1999. 2004
could surpass 1.5 million.” And, in Reno, Tim Ruffin,
CCIM, SIOR, of Colliers International reports, “The Reno
office market had its second best year on record. The local
population grew 4.5 percent and unemployment is at 3.8
percent.” Charles W. Witters, SIOR, at Lee & Associates,
adds, “Corporate America is coming back to the Las
Vegas valley for the first time since September 11. Leasing
activity has greatly increased here.”
From Honolulu, SIOR member James M. Brown,
CCIM, SIOR, of Hawaii Commercial Real Estate (with
help form Paul G. Brewbaker, chief economist of the Bank
of Hawaii), we learn that the state economy “has been
accelerating since 1998, with the exception of a tourism
recession [September 11th, the military operations in
Afghanistan and Iraq, and SARS]. With tourism now
rebounding (about one-third of the state economy), military spending up (our second largest industry), and a
booming construction sector, Hawaii’s economy is clearly
in recovery.”
Where job gains have been less robust, the responses
are more temperate. Richard R. Kelly, SIOR of Grubb &
Ellis/Quantum Commercial in Colorado Springs suggests
Consumer Confidence Has a Long Way To Go
160
Confidence Index
140
120
100
80
60
40
20
0
84
85
86
87
88
89
90
Source: The Conference Board
91
92
93
94
95
96
97
98
99
0
1
2
20
03 004
2
place ratings. Quite a comedown for the statistic that represents 70 percent of GDP! Nevertheless, this low rating
provides some shield against over-reaction to the evervolatile Consumer Confidence Index published by The
Conference Board, which stood at an 87.4 reading in
February 2003. A long-run view of this Index suggests
that it lags economic trends rather substantially. For
instance, the Confidence Index did not rise above 100
until late 1995 in its recovery from the recession of 1991.
With this economic background in place, let’s see
what SIOR professionals have to say about the conditions
and outlook for the Western markets at the start of 2004.
Holliday Fenoglio Fowler, L.P.
Cyclical Turn in the Markets
Becoming Increasingly Evident
Start with a threshold
question: “Is the recession really over in your
market?” The employment change map is a
good guide to the
responses. In Nevada,
for example, the comments are enthusiastic.
Las Vegas SIOR members Bradley G. Peterson, SIOR,
and Randy E. Broadhead, CCIM, SIOR, of CB Richard
Ellis, assert unequivocally, “The recession is over and our
office market is in full recovery. Net
absorption was 1.2 million square feet
in 2003, which is close to our 1.5 million record in 1999. 2004 could surpass
1.5 million.” And, in
Reno, Tim Ruffin,
CCIM, SIOR, of
Colliers International
reports, “The Reno
office market had its second best year
on record. The local population grew
4.5 percent and unemployment is at 3.8
percent.” Charles W. Witters, SIOR, at
Lee & Associates, adds, “Corporate America is coming
back to the Las Vegas valley for the first time since
September 11. Leasing activity has greatly increased here.”
From Honolulu, SIOR member James M. Brown,
CCIM, SIOR, of Hawaii Commercial
Real Estate (with help form Paul G.
Brewbaker, chief economist of the Bank
of Hawaii), we learn that the state economy “has been accelerating since 1998,
with the exception of a tourism recession [September 11th, the military operations in Afghanistan and Iraq, and
SARS]. With tourism now rebounding
(about one-third of the state economy), military spending
up (our second largest industry), and a booming construction sector, Hawaii’s economy is clearly in recovery.”
Where job gains have been less robust, the responses
are more temperate. Richard R. Kelly,
SIOR of Grubb & Ellis/Quantum
Commercial in Colorado Springs suggests that his market “has experienced
subtle changes indicating our recovery is
forthcoming.” Michael A. Hefner,
SIOR, Voit Commercial, in Orange
County’s industrial market says,
“Although the recession is not yet over,
the local economy has shown significant
improvements with a measurable
increase in lease activity. The investment
and user sale market continues to perform well, with sales prices now at
record levels.”
“Not yet” is also the response from
Spokane’s Jeff K.
Johnson, CCIM, SIOR, of Kiemle &
Haygood Company. “Our unemployment rate has improved from 6.9 percent in 2002 to 6.6 percent at the end of
2003. Certain segments of our economy
are doing well. [But] many workers laid
off from tech jobs have been forced to
take lower paying jobs in our area to get
back into the workforce. We are being held back from full
recovery due to a lack of jobs for skilled professionals.”
John E. Casey, SIOR, at San Francisco’s Triton
Commer-cial, wryly offers the following remark on office
conditions: “We finally have a market
here—we have had two consecutive
quarters of positive absorption! If I died
and could come back to life as anything
I wanted, the second thing I would
want to be is a large office user in San
Francisco. There is a terrific selection of
large blocks of space all over town and
the rates are so low landlords are practically subsidizing tenants’ businesses.”
Tenants Still Hold the Cards, but
Odds May Be Shifting in 2004
In other markets, though, the mood of tenants and landlords is undergoing a shift, as negotiating power at the
bargaining table comes into greater balance. This is a
developing story at the beginning of 2004, but our local
experts see this as a year in which a turning point will be
reached.
In Boise’s office market, Peter J. Oliver, CCIM,
SIOR, Thornton Oliver Keller, notes, “There has been an
increase in activity from tenants, but they still hold the
balance of power in negotiations. It is still a renters’ market. Boise and the surrounding area did well during the
recession. Indications are that the area is gaining momentum for an upswing.”
Bruce E. Hohenhaus, SIOR, of
Colliers International’s Sacramento
office, analyzes the situation this way:
“Tenants have been in the driver’s seat
for some time now, but we see equilibrium slowly returning to the marketplace. Declines in asking rents have
stopped. Concessions such as free rent
and better tenant improvement
allowances remain common, but are
gradually lessening as the overall market outlook improves. Competition
from sublease space is no longer the factor it once was.”
The office market is stirring in
Albuquerque as well, with over 500,000
square feet of new development on the
drawing boards, according to Scott W.
Throckmorton, SIOR, Argus Investment Realty. “We are definitely in a tenant’s market,” says Throckmorton.
“Tenants and their brokers are requesting and receiving greater incentives in
the form of free rent, TI, and reduced
rental rates. However, the market is
firmer than tenants believe and landlords will gain significant ground by year end.”
Similar conclusions are flowing from SIOR specialists
in the Western industrial markets as well. In Fresno, tenants are making the most of their cyclical bargaining
power. Stewart D. Randall, SIOR, Colliers Tingey
International, observes, “Over the past six months, the
businesses I talk to are generally optimistic, upbeat, and
feel the worst is behind them. It is clearly a tenant’s market, especially for large space. The tenants seem ‘testy’
and are very demanding of landlords. They want everything done ‘yesterday’ and demand responsiveness
beyond anything I’ve ever seen. Over half my deals are
‘rush’ priorties. Landlords who can react quickly benefit.”
Orange County’s Stan Mullin, CCIM, CRE, SIOR,
Grubb & Ellis, Newport Beach, says that tenant demand
has grown in the last six months. As a result, lease rates
says Throckmorton. “Tenants and their brokers are
requesting and receiving greater incentives in the form of
free rent, TI, and reduced rental rates. However, the market is firmer than tenants believe and landlords will gain
significant ground by year end.”
Similar conclusions are flowing from SIOR specialists
in the Western industrial markets as well. In Fresno, tenants are making the most of their cyclical bargaining
power. Stewart D. Randall, SIOR, Colliers Tingey
International, observes, “Over the past
six months, the businesses I talk to are
generally optimistic, upbeat, and feel
the worst is behind them. It is clearly a
tenant’s market, especially for large
space. The tenants seem ‘testy’ and are
very demanding of landlords. They
want everything done ‘yesterday’ and
demand responsiveness beyond anything I’ve ever seen. Over half my deals are ‘rush’ priorties. Landlords who can react quickly
benefit.”
Orange County’s Stan Mullin,
CCIM, CRE, SIOR, Grubb & Ellis,
Newport Beach, says that tenant
demand has grown in the last six
months. As a result, lease rates are
beginning to rise back to previous
levels, which counters the limited leasing
activity recorded during the fourth
quarter of 2003. In contrast, sellers of small industrial and
office buildings have the leverage in the “sale” market.
“Although the vast majority of development in our county during the last two years has been of buildings smaller
than 12,000 square feet, demand by buyers (often moving
out of office buildings and multi-tenant industrial parks)
has outpaced supply. There is an unspoken concern that
if interest rates rise, or if SBA financing runs out, that the
last developers producing product could be left with large
amounts of unsold inventory. “ For the moment though,
there is nothing to indicate that this strong demand to
buy buildings will slow, when the total cost to buy is
comparable to paying rent.
Colliers International’s Greg F. Lagomarsino, SIOR,
indicates that in the Oakland industrial market “tenants
still control negotiations. Landlords are remaining flexible.
But their sense of urgency is subsiding, and owners are
focusing on credit quality and are not as aggressive with
concessions.” Lagomarsino concludes that these are signs
that “the worst is behind us.”
In Phoenix, SIOR members Tom Louer, SIOR, Lee &
Associates, and Thomas K. Knaub, CCIM, SIOR,
Colliers International, jointly report that this year will see
a reversal of power at the negotiating table. “There is
increased activity for Phoenix industrial space. It does
remain a tenants’ market. But tenants sense the need to
make deals in the improving economy before the balance
shifts to the landlord, in the third or fourth quarter of 2004.”
Surveying Current Industrial Conditions
Market conditions for warehouse/distribution space,
light manufacturing, and R&D/flex facilities run the
gamut from those that are still weak, to others in a turnaround mode at the start of 2004, to a few that have
already hit their stride. In the first category we might find
Boise, where Gary Buentgen, CCIM, SIOR
Intermountain Commercial Real Estate, states, “The recession is really not over—industrial properties are still
moving slowly. Product demand is what is holding us
back. Nothing is happening on the development front.
Many continue to predict better times ahead. However,
they don’t have any rationale to support these predictions.”
Nearby, in Spokane, Mark J. Lucas,
SIOR, Kiemle & Hagood Company,
paints a similar picture. “There is still a
high lease vacancy, with a number of
landlords willing to lease at rates lower
than what was obtained in 2000. The
balance of power depends on how long
the building has been vacant. There is
more of a sense of urgency from the
landlord’s position than from the tenant’s.”
Tucson has an
abundance of large
industrial facilities
available, reports
Robert C. Glaser,
CCIM, SIOR, PICOR
Commercial Real
Estate Services.
“Tenants rule in the
large space market,
and there is high vacancy in R&D,” says Glaser. “The rest
of the market is balanced. But conditions are improving.
There is minimal development, and business expansion is
occurring. The recession here was over by mid-2003.”
The timing of a turning point last summer is a common refrain from many of the Western markets. This
makes considerable sense, as it is the point when the
economy began its GDP acceleration, a variable that more
directly affects industrial markets than office markets.
R.C. Myles, CCIM, SIOR, with Denver’s Fuller &
Company, says that his industrial market “hit bottom in mid-year 2003, statistic-ally speaking and based on activity indicators. Vacancy rates, including
sublease space, declined in both the
third and fourth quarters. Larger, longterm developers and industrial users
are positioning in the Denver market for
the anticipated rebound. We expect speculative construction to pick up in late 2004 and early
2005.”
In Reno, Paul Perkins, SIOR, of Colliers International,
indicates, “at mid-2003, we had more than 817,000 square
feet of negative absorption, but ended the year at almost
The balance of power depends on how
long the building has been vacant.
There is more of a sense of urgency
from the landlord’s position than from the
tenant’s.”
Tucson has an abundance of large
industrial facilities available, reports
Robert C. Glaser,
CCIM, SIOR, PICOR
Commercial Real Estate Services.
“Tenants rule in the large space market,
and there is high vacancy in R&D,” says
Glaser. “The rest of the market is balanced. But conditions are improving.
There is minimal development, and
business expansion is occurring. The
recession here was over by mid-2003.”
The timing of a turning point last summer is a common refrain from many of the Western markets. This
makes considerable sense, as it is the point when the
economy began its GDP acceleration, a variable that more
directly affects industrial markets than office markets.
R.C. Myles, CCIM, SIOR, with Denver’s Fuller &
Company, says that his industrial market
“hit bottom in mid-year 2003, statistically speaking and based on activity indicators. Vacancy rates, including sublease
space, declined in both the third and
fourth quarters. Larger, long-term developers and industrial users are positioning in the Denver market for the anticipated rebound. We expect speculative construction to pick up in late 2004 and early 2005.”
In Reno, Paul Perkins, SIOR, of Colliers International,
indicates, “at mid-2003, we had more than 817,000 square
feet of negative absorption, but ended the year at almost
270,000 square feet of positive absorption, a turnaround of nearly 1.1 million
square feet. Landlords are seeing ‘light
at the end of the tunnel’ and are less
likely to give concessions or lower
rates. For the first time in years, developers are looking in earnest to acquire
land. Recent activity portends an
increase in the Reno/Sparks manufacturing sector, to augment its acknowledged distribution
base.”
James Chynoweth, CCIM, SIOR, with Maestas &
Ward Commercial Real Estate in Albuquerque, puts the
market rebound at exactly the same point in time. “As of
the middle of 2003, regional and national tenants began
making moves, either expanding or upgrading. The
smaller local tenants are just now starting to look around
again. Landlords are not offering the concession packages
they were six months ago.” He concludes, “It is nice to hear
the phone ring again.”
The large and very diverse California industrial markets are also stirring. Ernest J. Pearson, SIOR, Lee &
Associates-Central Valley, Inc., says of conditions in
Stockton and the Central Valley,
“During my more than 30 years in the
industrial brokerage business, I have
lived through numerous downturns
with varying degrees of severity and
causes. This most recent one has been
the longest drought I can recall. Signs of
life began appearing six months ago.
There has been an influx of large users
acquiring vacant land for new projects… for the first time since 2000.”
James L. McDonald, BCCR, SIOR
with Group 100 in Los Angeles’ San
Fernando Valley, remarks, “In spite of
the skewed perspective that most nonCalifornians have about our markets,
this is one of the most diverse and
healthy markets in the United States.
We have diversity of industries, quality and cost of facilities, labor supply, climate, and lifestyle. More than that,
Arnold will save us!” In Los Angeles
itself, Paul A. Sablock, SIOR, with
Colliers Seeley, explains, “We never really had a recession during all of 2002 and
2003. Now that we are running out of
buildings for sale, the user community
will be forced to look at the leasing environment. Sales of industrial facilities in
the greater L.A. area continue to be “on
fire.” With an ever-accelerating decline in the stock of
available land, the market should start shifting to users
taking advantage of the soft lease market. This trend may
also be reinforced if we see a rise in interest rates.”
Ventura County’s circumstances are much the same,
report SIOR members Michael M. Walsh, SIOR, and
Bram White, SIOR, of DAUM Commercial Real Estate
Services. “Leasing activity is beginning to pick up,” they
observe. “Landlords are becoming more optimistic but
are continuing to offer concessions and incentives to
attract tenants. All for-sale product is committed before
the completion of development, with multiple offers in
some cases. Sales prices have risen 20 percent in 18
months.”
Colliers International Richard D. Scherer, CCIM,
SIOR, in Sacramento, describes a similar dichotomy in
the lease and sales market for industrial properties:
“Owner-user buildings less than 25,000 square feet are
‘on fire.’ Landlords of small units are losing tenants to
purchase. Tenants needing larger space are able to negotiate a rate that is below market to forestall relocation. If
you have a tenant in the 50,000-square-foot-and-above size
range, bring them to Sacramento and they will be treated
like a King!”
Undoubtedly, Silicon Valley is the marginal case in this
economic cycle. Nowhere has the “tech wreck” hit with
more devastating impact. David R. Sandlin, SIOR, of
Colliers International, acknowledges that the Silicon
Valley “is experiencing the extremes of this market cycle.
Silicon Valley has seen signs of rebound, but those signs
and cost of facilities, labor supply, climate, and lifestyle. More than that,
Arnold will save us!” In Los Angeles
itself, Paul A. Sablock, SIOR, with
Colliers Seeley, explains, “We never
really had a recession during all of 2002
and 2003. Now that we are running out
of buildings for sale, the user community will be forced to look at the leasing
environment. Sales of industrial facilities in the greater
L.A. area continue to be “on fire.” With an ever-accelerating decline in the stock of available land, the market
should start shifting to users taking advantage of the soft
lease market. This trend may also be reinforced if we see a
rise in interest rates.”
Ventura County’s circumstances are much the same,
report SIOR members Michael M.
Walsh, SIOR, and Bram White, SIOR,
of DAUM Commercial Real Estate
Services. “Leasing activity is beginning
to pick up,” they
observe. “Landlords
are becoming more
optimistic but are
continuing to offer
concessions and incentives to attract
tenants. All for-sale product is committed before the completion of development, with multiple offers in some
cases. Sales prices have risen 20 percent in 18 months.”
Colliers International Richard D. Scherer, CCIM,
SIOR, in Sacramento, describes a similar dichotomy in the lease and sales
market for industrial properties:
“Owner-user buildings less than 25,000
square feet are ‘on fire.’ Landlords of
small units are losing tenants to purchase. Tenants needing larger space are
able to negotiate a rate that is below
market to forestall relocation. If you
have a tenant in the 50,000-square-foot-and-above size
range, bring them to Sacramento and they will be treated
like a King!”
Undoubtedly, Silicon Valley is the marginal case in this
economic cycle. Nowhere has the “tech
wreck” hit with more devastating
impact. David R. Sandlin, SIOR, of
Colliers International, acknowledges
that the Silicon Valley “is experiencing
the extremes of this market cycle.
Silicon Valley has seen signs of
rebound, but those signs are too weak
to result in a quick market recovery.
Gross absorption is up from 2002, but with 66.4 million
square feet vacant (an availability rate of 21.2 percent),
we will need several years of sustained absorption before
rents start to edge upward. This cycle will pass. Historically, Silicon Valley has done one thing better than any
other area of the world, and that is grow new ideas into
viable companies. It now has a stronger base of emerging
growth companies than at any time in its past.”
Offices Turning the Corner
Consistent with the nation as a whole, both the Mountain
and the Pacific regions have higher vacancies in their office
markets than in the industrial sector. The Mountain states
tallied a 15.7 percent regional office vacancy as of the
Comparative Statistics survey, versus a 9.9 percent industrial vacancy. The figures for the Pacific area are 15.1 percent slack in the office market, and 9.4 percent for industrials. So, while the Western office markets are providing
some evidence of turning the corner in 2004, the path to
equilibrium may be a bit longer for this property type.
Denver is one example of a market where time will
be needed to stabilize conditions prior
to registering real improvements.
Robert M. Whittelsey, SIOR, of Colliers
Bennett & Kahnweiler, anticipates that
2004 will not see significant growth,
and tenants all remain in command
during negotiations. “Although numerous submarkets reported positive
absorption for direct space in the second half of 2003,” says Whittelsey, “absorption for the
entire year was negative. Additionally, there is a significant amount of underutilized space in Denver. Although
economists are forecasting 15,000 new jobs, those will not
correlate to significant positive absorption.” The path
ahead will see modest initial steps where rent concessions
decrease and perhaps a minimal amount of upward pressure on asking rents, according to Whittelsey.
In Orange County, also, the balance is still tilted in
favor of tenants, report
SIOR members Daniel
F. Knudson, SIOR,
and Kenneth E.
Hulbert, SIOR, of
GVA Daum. Vacancy is
now down to 14.8 percent, they indicate. But
“development is still a
ways off as a result, and recovery is being measured by the
level of absorption.” These specialists note that 2003 was
the best year for this market since the calendar moved
into the 2000s, with three million square feet of net
absorption tallied over the past 12 months.
William G. Kiefer, SIOR, at Ventura County’s NAI
Capital Commercial, maintains that the
recession was never that significant in
his market, owing to the diversified economic base there. Unusual among the
reporting SIORs, Kiefer assesses the
negotiating balance as being tilted, perhaps 60/40, in favor of landlords in this
office market. “There is little sublease
out there, and increased urgency to get
deals done,” he asserts. “Ventura County is a very bright
spot according to numerous institutional investment
houses and lenders, characterized by diversified employment, affluent households, and a strong educational system.”
In Phoenix, Lee & Associates’ John G. Cerchiai, SIOR,
describes the future economy of the
Valley of the Sun as focusing on five
priority industry clusters: aerospace
and aviation; bio-industry; advanced
financial and business services; high
technology; and software. “The recession is really over in the Metro Phoenix
market,” Cerchiai states. “It is projected
that 29 percent of Greater Phoenix
employers are planning to expand their workforce in the
first quarter of 2004. Business capital spending and software expenditures are expected to rise. The mood of tenants is that now is the time to make their best deals,
because the window for attractive lease terms will not
remain open much longer. Businesses are growing, and
space is needed for existing and immediately pressing
expansion requirements.” Because of this, Cerchiai anticipates increasing development during 2004 and 2005.
So, by and large, the flood of vacancy appears to be
receding in the Western commercial real estate markets.
Both office and industrial property types are beginning to
blossom into a new growth phase, in the rich alluvial economic soil of markets characterized by rents that are still
affordable, ample choices available to businesses, and low
interest rates to finance expansion. If, as we predicted a
year ago, this region is the epicenter of a widening
national recovery, the patterns reported in the West may
well set the stage for a strong 2004 in other regions as well.
Finally, in California’s Central Valley—including the
Fresno, Bakersfield, Stockton, and
Modesto office markets—the landlords
hold the upper hand, according to
Robert J. Fena, SIOR, of Colliers
Tingey International. “We never really
felt any recession, as unbelievable as it
seems,” reports Fena. “When the major
coastal markets are impacted, it takes
12 to 18 months before it reaches us,
and many times has little affect.
Vacancy rates are in single digits for the first time in 30
years here. Overall vacancy in the 22-million-square-foot
Fresno/Clovis metro area, for instance, is approximately
nine percent. Rents are increasing steadily, not peaking
tremendously, and so developers are building with
caution.” With such supply/demand forces shaping the
outlook, the Central Valley looks to a couple of solid
years at or near the point of healthy equilibrium in 2004
and 2005. v