CoStar: 2015 Best US Office Year Since 2007

CoStar Group has released its State of the U.S. Office Market 2015 Review and Forecast, which reflects that U.S. office net absorption topped 100 million square feet for the first time since the Great Recession. With the office vacancy rate down from 11.3% in 2014 to 10.8% at the end of 2015, CoStar cites broadening demand and constrained levels of construction contributed to tightening space availability in virtually every metro area.

"The market is overwhelmingly strong at this point in the cycle. With the momentum in the market, I’m sure the next quarter will also be strong," said Hans Nordby, managing director of CoStar Portfolio Strategy, who presented the findings along with CoStar Director of Office Research Walter Page and Vice President and Research Director Dean Violagis.

Highlights from the report include:

— Vacancies declined in 64% of the nation’s office submarkets and 56% of metro office markets during the fourth quarter of 2015. CoStar analysts expect office vacancy to continue trending lower to approximately 10% in 2017.

— Annual net absorption of office space increased to 101 million square feet in 2015, compared with 93 million square feet in 2014, while developers delivered 64 million space feet, a 41% increase over the previous year. The amount of new space under construction, which has trended downward in the last couple of quarters, stood at 126 million square feet at year end, a modest 7% increase from a year ago, and near the historical yearly average since 2000.

— 2015's 4.4% annual rent growth topped the previous year’s growth of 3.8%, with rents surging at a particularly strong rate in CBDs such as San Francisco at 19.4% and Raleigh, NC at 13.9%. Even in the urban core of Atlanta and Detroit, rents in the urban core rose at 11.2% and 10.5%, respectively.

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CRE Prices Crest Pre-Recession Peak

The latest Moody's/RCA Commercial Property Price Indices (CPPI) report was released this week, revealing that in August the CPPI rose 1.6%, topping its pre-crisis peak on a Consumer Price Index (CPI) adjusted basis. According to the report, which captures the national all-property composite index over the past three months, the CPPI now stands 14.5% above its pre-crisis peak on a nominal basis and 1.5% above it on a real, CPI adjusted basis. Central business district (CBD) office was the best-performing segment, while core commercial property prices are approximately 8% higher than their prior peak,

"Central business district office was by far the best-performing segment of the CPPI in the past three months, with prices rising 6.3%," says Moody's Director of Commercial Real Estate Research, Tad Philipp. "Suburban office was the next-best-performing segment, with prices up 3%."

Jim Costello, RCA's senior vice president, said prices have been pushed up because the capitalization rates have been falling. The cap rate is a commonly used formula for valuing a commercial-property investment. It's calculated by dividing a property's net operating income by its current market value. If the cap rate falls while the expected income from the property remains roughly the same, the asset values tend to rise. "Most of the strong price appreciation we've seen to date has been a function of cap-rate compression, something like 70% of the price increases, in fact," Costello said.

Moody's/RCA researchers note that the only property sectors where prices have not exceeded their pre-recession peak are retail (still down 7%) and suburban office (down 9%). Moody's research subscribers can access the latest report here. For more news and information visit Blumberg Partners.

CRE in Florida Gets Foreign Investor Push

A new article from the National Real Estate Investor titled Lenders are Helping Foreign Investors Push Florida’s Real Estate Market to a New Peak examines the current international influx and impact bringing the market to a crest. An excerpt follows:

The established model is to pay all cash for the first property and leverage the income gained for the second deal. Now, they are joining with others to buy an apartment building, convert it to a condominium, and sell the units to individuals in foreign countries who agree to leave them in the rental pool run by the management company. Why? Foreign investors are more comfortable owning units than shares in an LLC. These transactions are all cash transactions from the seller’s standpoint.

Foreigners are also making regular use of syndicators who scout properties, which are often in the Miami area. Syndicators provide a second benefit of using their track records to help obtain financing. Due to the fact that these syndicators have or do own property in the country already, and have an operation, bank accounts, etc., a lender is able to qualify them in a traditional way. If a borrower approaches a bank and doesn’t have any assets in the states already, they know they will not be able to go outside the country to collect on any deficiency in case of a default. On top of that, they can’t know if the buyer or entity is getting their funds from drugs or other illegal affairs.

Lenders are also becoming much more accommodating than in recent years. The Florida banks that survived the Great Recession are returning the market. Their loan criteria put greater weight on the sponsor’s track record than the property as they seek to minimize risk and regulatory scrutiny.

To read the full report, click here. For more news and information visit Blumberg Capital Partners.

Tenants and the Recession

The National Bureau of Economic Research announced that the recession ended and economic recovery began in June 2009, but according to CRE service providers economic conditions for most American tenants are still in the pre-June 2009 cycle. CoStar has interviewed a group of real estate professionals taking a closer look at the divide between overall economic conditions and real estate needs, noting that it takes longer for businesses to see a need to expand into more space post-recession.

"Many mid-size and smaller companies are afraid of the possibility of a double dip recession. They are unconvinced that the recession is really over, despite the statements by several so-called economic pundits that the it "technically" ended in June 2009," said Howard Applebaum, president of Corporate America Realty & Advisors, a tenant rep firm in Rutherford, NJ. "Until we see greater access to financial liquidity and greater financial leverage for business and real estate borrowings, companies will remain conservative and avoid adding staff. What must be feared here is that without the capability of loosening the credit restrictions that banks have placed, it can lead to further staff reductions as companies that do not have access to "Wall Street" capital will burn through their cash holdings."

"Companies in the past two to three years have downsized and extended their leases; these companies do not have excess space," said Scott Abernethy, senior vice president of Cassidy Turley in Cincinnati, OH, noting that 90% of the companies they talk to are not hiring. "However, many firms with leases farther out in the future have excess space that they can't unload. If the economy improves, they feel they can backfill that excess."

"My feeling is true recovery will not occur until unemployment and sentiment/confidence returns,"said Kenneth W. Colwell, senior leasing and sales associate of Paragon Real Estate Group in San Francisco. "Only users who are recession-proof will expand or relocate, that includes medical and government, with startups looking for rock bottom subleases deals."

For more news and information visit Blumberg Capital Partners.