According to global commercial real estate consultants CBRE, the U.S. commercial real estate market improved strongly across all property types in the second quarter (Q2) of 2014.
"Commercial real estate leasing activity in Q2 2014 picked up from the weather-affected levels of the prior quarter," said Jon Southard, Managing Director of CBRE's Econometric Advisors group. "The pace of demand can finally be described as good--without the caveat of 'for this recovery.'"
CBRE Report Highlights Include:
The office vacancy rate declined by 30 basis points (bps) to reach 14.5% in Q2 2014. This was an improvement for the national office market following a 10 bps decline in the vacancy rate in Q1 2014.
•In Q2 2014, national industrial availability1 decreased by 30 bps from Q1 2014, to 10.8%.
•The retail availability rate declined 11.7%, down 20 bps compared to Q1 2014.
•Demand for the nation's apartment buildings continued to grow with vacancy of 4.4% in Q2 2014.
The U.S. Office Market
In Q2 2014, the suburbs edged out downtown submarkets with the suburban vacancy rate declining by 40 bps to reach
15.9% while the downtown vacancy rate fell by 30 bps to reach 11.8%. A majority of markets continued to see their vacancy rates fall during the quarter, with rates falling in 45 of the 63 office markets tracked while rising in 15 and remaining unchanged in three.
Although improvement continue to broaden across markets, those with heavy concentrations of tech and energy companies were once again among the top performers in the second quarter. St. Louis set the pace with a vacancy rate decline of 210 bps, followed by Raleigh (-170 bps), (-120 bps), Oklahoma City (-120 bps), San Jose (-100 bps) and Orange County (-100 bps). While reaming well above the pre-crisis levels, vacancies continue to decline rapidly in markets such as Las Vegas, Riverside and Tucson, whose economies are recovering from the housing crisis. Vacancy rates in all three markets fell by 90 bps in the second quarter. Of the 15
markets with rising vacancies, only in two did the vacancy rate rise by more than 100 bps: Albuquerque (+150 bps) and Richmond (+150 bps).
"The office recovery continues to advance with the lack of development in most markets as well as strength in private-sector payrolls continuing to support occupancy growth," said Mr. Southard. "Continued private sector job growth will be key for further office market improvement and the strong jobs gains reported for June is an encouraging sign."
CBRE's preliminary estimate is for the U.S. office market vacancy rate to fall to 14.4% by year end.
Industrial Market
With the availability rate falling to 10.8%, the industrial market has now seen its recovery stretch to 16 consecutive quarters, and the current level is 370 bps below the cycle high.
A majority of markets continued to improve during Q2 2014, with 40 reporting declines in availability while nine remained unchanged and 12 showed increases.
The declines in availability were led by Fort Lauderdale (-110 bps), Las Vegas, Nashville, and Atlanta (each with 100-bps decreases). The decrease in Nashville more than erases the 70-bps increase reported during the first quarter. Large markets reporting healthy declines in Q2 2014 were Philadelphia (-60 bps), Boston (-40 bps), Los Angeles (-40 bps), Detroit (-40 bps), and Chicago--the nation's largest industrial market--fell by 30 bps.
"The improvement in the nation's industrial sector continues as the economic expansion matures and gains more traction," noted Mr. Southard. "Following a challenging start to 2014 for the U.S. economy, we foresee more robust growth going forward as business conditions remain fundamentally healthy."
CBRE's preliminary estimate is that the national industrial availability rate will end 2014 at 10.7%.
Retail Market
Q2 2014's retail availability rate of 11.7% was down 20 bps compared to Q1 2014 and now stands 150 bps below the post-recession peak of 13.2%. 41 markets recorded declining availability rates in the second quarter compared to Q1 2014; 22 markets recorded flat or increasing rates.
Tampa, Raleigh, Philadelphia and Charlotte recorded declines in availability rates of at or over 60 bps in Q2 2014. Markets which recorded rising availability rates were Cleveland, St. Louis and Salt Lake City; each of these markets was 40 or more bps higher than in Q1 2014.
CBRE's preliminary estimate is for the availability rate for neighborhood and community shopping centers to decline to 11.0% in 2014.
Apartment Market
Preliminary data indicates that apartment demand continued to grow in Q2 2014, with the vacancy rate of 4.4%, a 20-bps drop compared to a year ago. The market remains tight by historical standards, with the vacancy rate below the long-term norm. The national apartment demand is now growing at a rate of almost 270,000 units or 1.9% on an annual basis, a pace that is stronger than what the market has seen historically, as well as during the last three years.
Vacancy rates declined in 38 of the 63 markets in CBRE's coverage. Markets with the biggest year-over-year declines in vacancy (80 bps or more) included Albuquerque, Jacksonville, Sacramento, Riverside, St. Louis, Fort Lauderdale, Atlanta, Cleveland, Las Vegas, Houston, Orange County and Ventura. The markets with the largest year-over-year increases in vacancy (50 bps or more) included Greensboro, Norfolk, Salt Lake City, San Antonio, Birmingham, and Greenville. Markets with the lowest vacancy rates (at or below 3%) included Oakland, San Jose, Portland, Minneapolis, Miami, Ventura, Boston, Providence, Newark, and Pittsburgh.
Effective rent growth continued to improve last quarter, but is still remaining in the 2.5-3% per year range in most areas.
CBRE's preliminary estimate is that the U.S. multi-housing market vacancy rate will average 4.7% in 2014.
fulfilled. Within these four areas of concern we will find all the questions that need to be asked and answered to determine the feasibility of any commercial real estate transaction or project. How straightforward is that?
So what do these areas of concern entail? In simple terms, they can be summarized by a description of the inquiry they present.
1. Market Demand
Market demand asks this question: Is the proposed project needed or wanted by target consumers in the geographic area within which the property is located?
Market demand is the most fundamental of the four aspects of commercial real estate. If there is no market demand, the transaction or project should not go forward. If you are developing, financing or investing in a real estate project, make sure there is market demand for what is being offered. If you are a strategic user intending to occupy and use the property yourself, market demand may be satisfied by your own business needs. If you are investing on speculation, be sure you know the demand of your intended market.
Determining market demand seldom involves a legal question. No attorney time is necessary. [See? I’m saving you money already.]
2. Access
Access asks this question: Assuming adequate market demand to justify the proposed transaction or project, can target consumers seeking the goods or services to be offered at or from the property get to it with ease? This aspect includes evaluation of:
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3. Use
Use asks this question: Can the property be used as intended? This aspect includes an inquiry into:
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4. Finances
Finances asks these questions: (a) Can funds be obtained to acquire, construct, and operate the project? and (b) Will the investor receive an adequate return on investment to justify proceeding with the transaction or project?
To answer these questions we must know the cost of acquisition or development and the net operating income and capital recovery expected to be generated by the project.
We must determine whether costly environmental remediation or institutional controls will be required; the amount of applicable user fees; environmental impact mitigation costs, if any; real estate taxes; special assessments; tenant allowance or build-out requirements; and all other factors having an economic impact.
Although finances are primarily a business concern, certain aspects of project finance do fall within the realm of legal due diligence. Thus the reference to one-half of the Finances concern being within the realm of attorney conducted due diligence.
Documentation of equity investments and project loans, as well as hybrids such as mezzanine financing, demand the attention of legal counsel.
If the property is leased, an evaluation of the amount, velocity and durability of the revenue stream and any financial commitments of the owner/landlord are often considered by counsel.
Certainly, if public money is sought to reduce the net cost of development, legal counsel is required.
Other Due Diligence Concerns
The four areas of concern described above pertain to the “real estate” aspects of the transaction. If you are dealing with commercial real estate, your due diligence must focus on these issues.
Every capital transaction has other due diligence concerns as well. These other concerns are beyond the scope of this post, but may include issues pertaining to entity structure, authority of the parties, income and capital gains taxation and tax deferments, securities, and the overall structure of the transaction, to name just a few.
Commercial real estate due diligence is not rocket science but . . .
. . . it certainly helps if you know what you’re looking for.
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By WPC Staff | July 7, 2014
“Everything should be made as simple as possible, but not simpler.” -Albert Einstein