Spiking rents in some office metros highlighted real estate property performance in the first quarter according to Randy Fuchs's analysis during June's Coldwelll Banker Commercial webcast. Key takeaways from the session entitled "Office Markets Break from the Pack" included:
Office Markets Break Out - The headline story of the First Quarter, 2006 is the out-performance of the office markets. Office demand was nearly 15 million square feet in the quarter according to Reis, on par with the volume last quarter but significantly above levels of this period last year. Coupled with a scarcity of new office product, office vacancies are tumbling. At 14.0%, the national vacancy rate was down 53 basis points (bps) sequentially and is now 200 bps below the rate of 1Q 2005 and the lowest since the tech fall-out in 2001. In fact, a number of the tech-related metro areas are making up for lost time: e.g., the vacancy rate in San Jose nose-dived by 210 bps in the first quarter alone (to 16.4%). The contracting vacancies have, in turn, empowered landlords to raise rents. Effective rents, up 3.4% for all of 2005, jumped 2.2% nationally in the first quarter alone, paced by the outsized increase of 3.3% in the West region. Nationally, rents are up 5% year over year, with 7% gains in the West since this period last year and 6% in the Northeast. This office rental performance is tops among all major property types and augurs a momentum shift, or sector rotation out of the Retail sector to Office where the market fundamentals are perhaps the strongest. The announcement of the private buyout of the office REIT Trizec by Blackstone and Brookfield Properties, at a nearly 20% premium to net asset value, is only the latest confirmation of the improving performance of, and bets being placed on, this property type.
Retail Loses Luster - The sector rotation seemingly comes at the expense of neighborhood and community shopping centers. The fact is that retail has had an amazing bull run over the last four years, as other sectors languished. Now, though retail market fundamentals are still healthy, it appears that the momentum is slowing and, from an investment perspective, the sector presents less of an upside compared with other property types. According to RCA, sales volume for malls and strip centers, for example, were $7.3 billion in the quarter, down 44% sequentially and 19% below the volume of a year ago. This is the weakest performance among the major property types. Against this backdrop, demand for retail space slowed to 2.6 million square feet in the first quarter according to data from Reis, down substantially from the 7 million last quarter and below net absorption levels of a year ago. However, with only modest development pressure vacancies remain stable at 6.7% nationally. California metro areas, benefiting from robust economic and demographic conditions, as well as constrained supplies of land for new shopping centers, account for 7 of the 8 tightest markets in the country, led by Orange County and Oakland-East Bay at 2.5%.
Residential Housing Dips Further - Evidence is mounting that sales of single-family homes and condos are losing steam. Existing U.S. home sales fell 2% in April from the previous month, and the rate of growth is 5.6% below the pace in April 2005. Moreover, there were a record 3.4 million homes for sale in April, which translates into a six-month supply of homes at the existing sales pace - the highest level since the beginning of 1998. New home sales aren't faring any better. In fact, April's inventory of new homes for sale hit a record 550,000, over a 25% increase year over year. Meanwhile, condo sales are tailing off, too. Inventories have expanded to 7.1 month's supply, the highest level in at least five years. And perhaps the most telling statistic is that the median condo sale price fell 0.2% in April; though this is a modest change, it incorporates the first year-over-year decline in condo prices in 11 years.
Apartments Seize the Moment - The condo conversion trend, which has removed thousands of rental units from many markets around the country, has conspired with rising mortgage rates of late to assist the apartment market. In some metros, in fact, sizable portions of market-rate rental inventory have been erased: in Florida for instance, Fort Lauderdale has lost 16% of its rental inventory, Palm Beach-13% and Orlando-10%. With a national vacancy rate of 5.8%, down almost a full percentage point over 12 months, landlords find a hospitable climate for raising rents. Effective rents were up 1% in first quarter, and landlord concessions are declining with sizable reductions in renter benefits in the stronger markets of the West and Northeast. The top markets for rent growth are associated with either heavy condo conversion activity or supply-constrained markets: in the first period, rents were up 2.8% in Fort Lauderdale, 2.4% in Palm Beach and over 2% in Miami and Tampa. Also, rents in San Jose and San Francisco were up roughly 2% each. The top 10 markets for rent growth over the last year are either in California, Florida or New York.
For a pdf version of the “Office Markets Break from the Pack” presentation, click here. To hear a replay of the audio and visual presentation, visit the Coldwell Banker Commercial web site and click on the Viewpoint webcast link on the home page.