Commercial Investment Real Estate March/April 2016 | Page 31

house more people in their space.
Landlords in the Midtown
area are responding to that new
competition by investing heav-
ily in their buildings, Evans says.
“It is a very robust market. T e
key thing when you are buying
a f xer-upper in this market is
to understand the functional
obsolescence that can and can-
not be cured,” he says. For exam-
ple, New York City has specif c
requirements on life safety
issues, which controls maximum
occupancy on f oors based on
the size of stairwells and amount
of people they can safely evacu-
ate in the event of an emergency
situation. Even if a landlord suc-
cessfully completes a renovation
to create more ef cient space, the
property could be hindered by
existing building codes, he says.
Fighting for Talent
Today’s younger employees are
attracted to work spaces that
offer features such as shower
facilities for employees who
bike to work, outdoor terraces,
and common area lounges.
And given the war for talent
among companies, “Landlords
are investing in those somewhat
expensive amenities to draw and
retain tenants,” Evans says. “If
they don’t do it, they will not
be able to attract the quality of
tenants that have anchored the
buildings for the last 50 years.
Those tenants will move to
other locations,” he says.
T e of ce market in Peoria,
Ill., is a far cry from that of New
York City. Peoria’s downtown
is still struggling with signif -
cant office vacancies near 25
percent, compared to Manhat-
tan’s rebound where vacancy
has dropped below 9 percent.
Yet Peoria’s building owners are
facing many of the same chal-
lenges of trying to attract and
CCIM.com
retain tenants in a market where
there has been a seismic shif in
the type of space that appeals to
today’s millennial workers.
Particularly for buildings
where asking rents are very
close, within 2 to 5 percent, the
look and feel of a property can
swing decisions, says Katie Kim,
CCIM, CEO and director of the
commercial division at Keller
Williams/The Kim Group in
Peoria. “With our vacancy the
way it is, companies going into
these spaces are demanding that
landlords do those renovations
in order to get their business,”
says Kim.
Today’s tenants are feeling
the pressure to attract workers.
“T ey need their space to say we
are an exciting company. We’re
inviting. Come work for us. And
they are putting a lot of that back
on the landlord,” Kim says. For
example, one tech start-up com-
pany that Kim recently worked
with requested a slide between
the second and f rst f oor. T e
landlord complied.
Overcoming Challenges
As in many metros, Peoria’s
landlords need to manage the
cost of renovation versus cur-
rent rental rates. “T ere is a gap
with what the current rental
market will bear, and the cost
of construction does not allow
for great returns for a lot of our
of ce tenants,” Kim says.
However, as part of its ef orts
to entice companies back down-
town, the city of Peoria is of er-
ing a number of economic incen-
tives to promote development
and redevelopment in targeted
areas such as its River’s Edge
District. Owners and develop-
ers can access federal and state
historic tax credits and other
tax credits specif c to the River’s
Edge Redevelopment Zone that
DEVELOPMENT
PIPELINE SLOW
TO FILL
by Beth Mattson-Teig
Given the pace of the offi ce market recovery, it is no surprise
that new ground-up development has been slow to return.
Although construction is on the rise, it is still low compared
to historical norms. The estimated 68.9 million square feet of
new space added in 2015 is up from the 44.0 msf delivered
in 2014, according to CoStar. However, activity is below pre-
recession levels where annual new supply surpassed 100 msf.
In 2005 and 2006, for example, the net new supply grew by
100.1 and 117.4 msf respectively.
New construction remains lower for obvious reasons. Many
metros are still dealing with elevated vacancies and tenants who
are reluctant to pay the higher rents needed to support new con-
struction. In addition, tenants are using space more effi ciently
and shrinking the amount of space they need per employee. “A
lot of corporations have looked very hard at their space usage
and have tried to decrease the number of square feet per
worker,” says Hans Nordby, a managing director at CoStar Group
in Boston. Although that trend may be starting to fl atten in some
metros, it has had an impact on the demand for space, he adds.
“The markets that saw construction fi rst were those that had
the most successful economies,” Nordby says. Four to fi ve years
ago, those cities that took the lead in emerging from the recession
were energy and tech markets such as Houston and Seattle.
Development remains a ways off in the future for many metros,
while others are seeing that turning point drawing closer. In
Fresno, Calif., for example, lease rates have not reached levels
that justify spec offi ce building. However, the vacancy is dropping
to the low single digits and lease rates are starting to climb, says
Brett Visintainer, CCIM, a vice president, investment division at
Newmark Grubb Pearson Commercial in Fresno, Calif. “It will only
be a matter of time before Fresno starts seeing new development
go up from developers that are looking to spec offi ce buildings,”
he says. “I would expect to see some dirt moving late 2016 and
early 2017 based on current market conditions.”
CoStar is forecasting a gradual expansion of construction
activity. In fact, 2016’s new supply is likely to be slightly below
that of 2015 with the market expected to add 64.9 msf fol-
lowed by 79.7 msf in 2017.
“That is a good picture of what is happening nationally, but
there are dramatic differences in what is happening in individ-
ual metros,” Nordby says. For example, San Jose, Calif., is “on
fi re” because the local economy is very hot. The job growth
and the local economic growth occurring at the local level is a
good leading indicator of what lies ahead for both new ground-
up construction, as well as opportunities to rehab existing
buildings, he adds.
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