Commercial Investment Real Estate September/October 2013 - Page 30

Yet despite low rents, some tenants are only leasing the space that they need, John- son says. “I see tenants preferring to work in a space where they may have less space than they 18% 10 need rather than more, just in case they shrink Net absorption p Vacancy y rate rather than grow in the near future.” 5 17% But in more robust energy- and tech-driven markets, where new construction has begun, 0 what corporate America is giving up in quan- 16% -5 tity, it is looking for in quality, showing a dis- tinct preference for new class A space, very -10 15% little of which is available in many markets. While 7.6 million sf of new office product -15 14% came online in 2Q13, the most since 2Q10, 1Q13 delivered only 2.2 million sf — the low- -20 est amount since 1999, according to Reis. 13% -25 T ere is near-record occupancy among most of Tulsa, Okla.’s better A class of ce properties, -30 12% says Patrick Coates, CCIM, broker/owner of Coates Commercial Properties in Tulsa. “T e class A of ce market is tight with only about 7.0 Source: Reis percent vacancy rate and rents have increased more than $1 psf for Tulsa’s existing class A of ce build- eral large owner/occupant national headquarters are ings,” he says. In addition, three new multitenant buildings currently under construction near Green Bay, Wis., went up in Tulsa this past year, adding more than 450,000 “representing the f rst substantial of ce expansion in sf to the market, most of it already leased. a decade,” says Steve Seidl, CCIM, SIOR, of Seidl & Associates, in Green Bay. However, the vacated space Recession Math will add to an already-oversupplied market where But the bid for quality over quantity exacerbates the older class A space, much of it sold in foreclosure, gets rent growth struggle in many less-robust markets. Sev- a new coat of paint and new carpeting and comes back on the market at discounted rents. “T ese factors are driving rates in our suburban market into the $5 psf to $6 psf range,” Seidl says. T is post-recession math is hurting landlords who held on to their properties, adds Jerry Fiume, CCIM, account executive for NAI Cummins in Akron, Ohio, outside of Cleveland. “We are still leasing space for $12 psf NNN, which is about the same as we were charging 20 years ago. But build-out costs are about $45 psf to $50 psf now, versus $20 psf about 20 years ago.” It’s hard for the math to add up for landlords, he says, except for investors who bought properties for 30 cents on the dollar. “For everyone else, the recovery will take place when the market starts to support $18 psf NNN rental numbers,” he says. Seidl considers another solution. “Until our supply diminishes, the office lease market will continue to struggle. Our market may reach a point where it is not overbuilt but underdemolished.” Offi ce Net Absorption and Vacancy Employment Trends 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% 6.0% Jun Nov Apr Sep Feb Jul 2007 2008 Source: Reis 28 September | October | 2013 2009 Dec May Oct Mar Aug Jan Jun Nov Apr 2010 2011 2012 2013 Sara Drummond is executive editor of Commercial Investment Real Estate. Commercial Investment Real Estate