Key findings of this year’s IRR-Viewpoint include:
Office
- Continued high unemployment rates, particularly in cities such as Detroit and Las Vegas, are suppressing recovery in the office sector. In locales where major employers continue to downsize their workforce, vacancy rates continue to increase and rents fall as supply overshadows demand. The CBD office vacancy rate increased from 13.42% at the end of 2009 to a current rate of 14.55%. Similarly, suburban office vacancies have increased from 15.45% to 17.10%.
- Due to limited construction activity, office inventories have remained relatively unchanged from last year. Furthermore, development in the pipeline remains low. For both CBD and suburban markets, construction activity for the next three years is expected to decrease approximately 10%. Partly due to/related to these trends, the projected years required to balance office supply and demand decreased over last year, falling from 6.25 to 5.66 for CBD markets and 5.96 to 5.28 for suburban markets.
- Cities with diversified industries were less impacted by the downturn in the economy than were cities that relied heavily on financial services and real estate sectors. In order to combat rising vacancy rates, many markets have turned to offering increased rent abatements and tenant improvement allowances.
Retail
- Cities with high unemployment such as Detroit, Sacramento, and Syracuse have suffered the largest setbacks in the retail market, with steadily climbing vacancy rates since 2008. Those markets have seen vacancy increases of 6.09%, 7.32%, and 4.62% respectively in the past two years. The markets with the highest retail vacancy rates in 2010 are Houston at 16.17%, Dayton at 17.57%, and Providence at 20%. At the other end of the spectrum, some locales have seen a drop in vacancy rates, including Austin, Greenville, and San Francisco.
- Many survey participants indicated that stabilized, well anchored properties with a good tenant mix were still in demand despite an influx in supply of retail property as a whole.
- The falling rents, increased vacancy rates, and an inability to obtain capital that has been associated with the economic downturn have effectively shut down many new retail construction projects.
Multifamily
- The apartment sector was the only sector to see expansion during 2010 and is usually the first sector to rebound after a recession. 81% percent of markets are in the recovery or expansion phase compared to only 9% last year.
- The average apartment vacancy rates decreased from 7.63% to 5.05%. At 13.87%, Houston posted the highest apartment vacancy, while New York reported a vacancy of just 3.30%, the lowest of all surveyed markets. In conjunction with decreased vacancy, the estimated years required to balance current supply and demand fell from 2.74 to 1.83.
- While higher quality properties continue to enjoy strong occupancies and stable rent, many older Class B properties are struggling to compete. As single-family residences are added to the market, Integra expects further pressure to be placed on lower end multifamily properties.
- Construction forecasts are up 6% this year. With construction and absorption expectations improving, of the four major markets (office, multifamily, industrial, and retail), the apartment sector is showing the strongest signs of recovery.
Industrial
- Vacancy rates continued to climb from 8.57% in 2008, to 10.17% in 2009, to 10.85% in 2010. Notably, projected annual absorption for 2011-2013 reversed its freefall of 41%, from 86 million square feet per year in 2009 to 51 million square feet per year in 2010, by increasing to 59 million square feet per year in 2011.
- Planned development has seen a decrease. Last year, 197.1 million square feet were in the pipeline as compared to this year’s 184.3 million square feet.
- 2010 survey participants anticipate that the number of years required to balance the industrial market is slightly less than 4.5 years. This represents a marginal improvement over past projections. Some Integra locations, such as Boise, are indicating that the industrial sector is the strongest of the three non-residential markets. The industrial markets which fared the best over the past couple of years are those that entered the economic slowdown with little current speculative construction. Many markets report the first submarkets to show signs of recovery include well-located, high-quality properties.
Lodging
- As of 3Q 2010, the market appears more than ready to recognize the inherent value of quality full service properties and well-known brands. Lodging Econometrics reports that REITs have spent $1.87 billion on 3Q 2010 acquisitions, over ten times the amount spent by REITS for the same period in 2009.
- Occupancy is forecasted to increase by 4.4% in 2010, reaching a level of 57.1% as compared to the 61% average occupancy from 1999 to 2009. Occupancy is expected to increase another 1.4% by 2011, reaching 57.9%. Average daily rate (ADR) is projected to end 2010 at $97.74, up 0.5% from the same time last year. ADR is expected to further increase to $101.55 for 2011.
- These dramatic changes in occupancy and ADR, combined with scarce construction financing and a sparse development pipeline suggest the favored brands and locations of this sector will be able to regain footing quickly. In the secondary and tertiary markets, however, and where the demand drivers remain distressed, solid footing may remain elusive for the foreseeable future.
Green Building
- The growing trend toward sustainable construction and retrofitting, otherwise known as the "greening" of commercial real estate, is linked to social pressures and expectations from both the public and the younger workforce, as well as government agencies. According to figures from various studies, including the U.S. Environmental Protection Agency (EPA) and U.S. Green Building Council (USGBC), Denver, Colorado has more green building activity per capita than any other major city in the nation. Other cities in which significant green building and retrofitting are occurring are San Francisco, Houston, Minneapolis/St. Paul, Washington D.C., and Chicago. Even traditionally non-green cities are getting into the action.
- The primary variable in which green buildings excel over non-green buildings is in vacancy and tenant retention. Even without an increase in lease rates, higher leasing velocity, higher occupancy/tenant retention, and lower operating costs can demonstrate why green buildings have a lower risk profile and are ultimately a more stable investment relative to competing non-green buildings. Market demand, current construction projects, and societal trends in the green real estate market are profoundly affecting current purchase and leasing activity.
“It is no secret that the last year has been challenging for the commercial real estate industry,” said Anthony S. Graziano, MAI, CRE, FRICS, Chairman of the Board. “Most areas of the real estate and financing industries are still struggling to recover from the recession. The high unemployment rate and difficulty obtaining financing will continue to limit the ability of the industry to fully recover for the foreseeable future. On the other hand, there are signs of life in commercial real estate. Transaction volumes are up, and cap rates reported by our offices are slightly lower. Integra professionals are reporting a segmenting of the markets as a major theme as we look toward 2011. The best Class A properties are getting the tenants, buyers and financing, but much of the industry is still struggling in these areas.”
