2004 Market Predictions
“The market drivers for the Chicago self-storage industry are residential moves and job growth. The sector is clearly an event-driven market. In 2004, similar to 2003, we expect more capital (private and public) to flow into the self-storage industry. Stable returns, coupled with a nearly negligent default ratio, are driving the capital flow. Additionally, the fragmented market allows a new player to be significant very quickly. Portfolio acquisitions are at an all-time high, as capitalization rates have plunged for all storage product types.
“We expect first-generation facilities (over 15 years old) and small-market properties to underperform 2004. As new competition enters the market, older product is less desirable to customers. Also, major markets with rental-rate increase capacity are attracting most of the new capital.”
— Marc A. Boorstein, CCIM, MJ Partners, Chicago
“The western Michigan market, which includes Grand Rapids, Lansing, Holland, Traverse City and Kalamazoo, is driven by the economy of Grand Rapids which has a population of 1.1 million (MSA). We have a very stable and diverse economic base, with 19 out of 20 manufacturing categories. Manufacturing has therefore been the area's leading economic driver. When unemployment levels recently reached the highest in a decade, the manufacturing and office sectors did slow considerably, but the retail market remained extremely healthy and continued to grow.
"In 2004 we expect manufacturing and office to show the beginning signs of recovery. It will be 2005 until these areas of the economy are in full swing again.
“The retail market is bustling in west Michigan. With attractive demographics (one of the highest in the Midwest and a median age of only 33) national retailers remain attracted to this area and development seems unabated. In 2004, construction should begin on several retail projects totaling over 1,000,000 square feet.
"As with retail, the office market will also show improvement but likely will not make it into the expansion phase. This market type will likely stay in its recovery phase with a slight improvement expected in and around downtown Grand Rapids. The recent transaction of Blue Cross Blue Shield to occupy the old Steketee's (over 100,000-sf) retail building is expected to bring an air of recovery for downtown.
“In downtown, the recent completion of the new 250,000-sf convention center, new county courthouse, new police station, several new medical research facilities, dramatic expansion of Grand Valley State University, and numerous restaurants and residential projects have not only increased office and tourism employment, but also have raised the level of expectation for further downtown office and retail leasing and development.
“Office, industrial, and retail will show gains in 2004. The industrial market, however, may take the longest time to improve (late 2004 and into 2005).”
— William W. Bussey Jr., CCIM, Grubb & Ellis Paramount Properties, Grand Rapids, Mich.
“The northern Illinois area is driven by manufacturing, retail, and population growth. I see 2004 as a very productive year with our projections indicating a percentage growth that will be extraordinary.
“Next year the sector with the most promise will be owner-occupied office condominiums. This is driven by several factors, especially low interest rates; lease vs. buy analyses clearly point to purchasing as the better choice. The industrial sector may lag but not a significant factor.”
—Peter J. Petrouski, CCIM, Premier Commercial Realty, Lake in the Hills, Ill.
“Kansas City's main economic drivers are service companies such as Sprint, Cerner Corp., and H&R Block, as well as manufacturing companies including Ford, General Motors, CertainTeed, and a host of others. I expect the service companies to stabilize (after three years of belt tightening) and begin showing signs of new growth by the fourth quarter. Manufacturing already picked up in third-quarter 2003, and I expect it to pick up steam through 2004 and into 2005.
“The downtown submarket is finally poised for a big leap forward, thanks in large part to the December 2003 announcement by H&R Block that they will be moving their corporate headquarters within the downtown loop. This will be the cornerstone of a new entertainment and residential district developed by the Cordish Co. The industrial market, specifically local manufacturing companies and regional distribution companies, should outperform their pace over the last three years.
“The metro-wide office market has yet to get on the recovery bandwagon and will continue to lag the other sectors' recovery if Sprint Corp. (headquartered in suburban Overland Park) announces further layoffs as expected. High-finish flex spaces should also underperform in 2004, as the marketplace absorbs the leftovers from the tech fallout and short recession.”
— Nathan Anderson, CCIM, Kessinger/Hunter & Co., Kansas City, Mo.
“Around ports Newark and Elizabeth and Newark Liberty International Airport, warehouse and distribution markets will remain strong. According to the latest U.S. census, New Jersey is the most densely populated state in the nation and has the highest per capita income. That combination makes retailers salivate for locations in the state, and with it comes the trucking, distribution, and warehousing needed to support the operation.
“I do not believe housing prices will continue to rise. Apartment rentals are getting soft and providing a more viable economic alternative. Also, I believe there will be a slight increase in interest rates by second-quarter 2004. Industrial will stay strong, and office will begin to improve as the elasticity of the U.S. economy and U.S. businesses completes its cost cutting and once again becomes profitable. ”
—Alan M. Lambiase, CCIM, River Terminal Development Co., Kearny, N.J.
“The main economic driver in the Miami market is South America, which is the largest trade region. I expect in 2004 a commercial turnaround in our marketplace. Because our office market lacked sizable technology users, it avoided the office vacancies caused by the dot-com crash. The continued interest by investors fleeing the stock market will continue to drive up prices for office properties in good locations.
“Multifamily product will continue to excel, as Miami has always had a strong leasing market due to the influx of residents from other parts of the country and outside the borders. South Florida's job growth is minimal, but population growth continues and so does foreign investment. The resurgence of the central business district as the newest 24/7 urban playground for workers and residents will continue to strengthen the central business district office market and the Brickell Avenue corridor.
“The industrial market will continue to underperform in 2004 due to the instability in South America and the ongoing war. The warehouse sector will continue flat as new inventory is delivered when leasing activity has slowed due to the economic problems in South America.”
— Rolando A. Alvarez, CCIM, CPM, Coldwell Banker Commercial NRT, Miami
“Tampa Bay, Fla., is the fifth-best new job market in the nation, has affordable land, and abundant new homes. I expect hotel recovery, new (smaller deals) for distribution, and office expansion due to continued low interest rates making it attractive for small business to own vs. lease. The central business district office market will falter, as oversupply continues, parking costs are high, and companies flee to suburban offices closer to the airport and other submarkets.”
— William A. Eshenbaugh, CCIM, bbre/Eshenbaugh Commercial Services, Clearwater, Fla.
“The economic drivers in Miami are growth, particularly population growth and foreign investment. We are transitioning from a larger international city, to a cosmopolitan area similar to New York and Chicago. As such, our growth is up not out, primarily because of the water boundary on the east side and the Everglades on the west.
“Along the Miami River and other east-west arteries should excel, as older sites are sold to be redeveloped into much denser multi-use developments. Again, upward growth is driving this redevelopment. New security restrictions along the river may expedite this redevelopment.
“We expect the industrial sector in the west airport area to underperform due to continued security concerns and a lagging transportation infrastructure that has not yet caught up with the unchecked growth of the last two decades.”
—John P. Rosser, CCIM, John Paul Rosser & Associates, Key Biscayne, Fla.
“In south Tampa Bay, Fla., diverse small local, regional, and national tenants drive the commercial real estate industry. Due to reasonable costs of living, continued residential development, quality of life, and constant population changes, I expect the south Tampa Bay market to continue to be very active.
“Office, flex, and showroom products on major thoroughfares along the I-75 corridor should excel this year because they offer the flexibility required by many diverse users. In addition, due to increasing traffic counts and a strategic location between Tampa Bay and Fort Myers, businesses are setting up back offices in south Tampa Bay and are willing to commute from their residence in surrounding markets to a primary business located in south Tampa Bay.
“Due to concerns about the stock market, corporate fraud, and questionable accounting practices, more investors find stabilized investment-grade properties and commercial real estate in general to be a safe alternative. As a result, investors are willing to acquire stabilized investment-grade properties or sale-leasebacks at historically low capitalization rates. If interest rates increase, investors will require a higher return, which decreases an asset's value and will decrease the internal return rate . Therefore, now is the time to sell.
“All product types in this market will perform well this year. In fact, markets within south Tampa Bay will outperform most markets throughout the country.
“One of the main factors that could negatively impact the market would be an increase in interest rates. If interest rates increase, which I don't believe is likely to happen in the immediate future, the office/flex condominium developments might not be an attractive alternative as they are today. However, if developers and owners are flexible and are willing to sell or lease, the office/flex condominium products will continue to fare quite well. An increase in interest rates also could negatively impact other product types and could have a profound negative impact on the economy. On the other hand, higher interest rates could create stronger leasing activity, because acquiring a property as an owner/user would not be as an attractive alternative as when interest rates were at historical lows.”
—Christopher Leonard, CCIM, Colliers Arnold, Clearwater, Fla.
“Last October, Tampa's local economy grew by 15,000 jobs over the year at an annual rate of 1.2 percent. According to a report just released by Prudential Real Estate Investors, the Tampa metro area will be one of the hottest employment markets in the nation over the next three years. Job growth is projected at 9.6 percent from 2004-2006, which ranks Tampa as the 10th-fastest growing market nationally. Leading the charge for growth in Tampa has been professional and business services, along with financial, health and education services. Growth in these sectors is a positive indicator for increasing activity in Tampa's office and industrial markets.
“Overall, Tampa's office market will benefit in 2004 from slowly declining vacancies and moderate positive net absorption. Speculative construction will continue to be very limited, but new build-to-suit and owner-occupied buildings are likely to be a positive factor for next year. Also, retail growth, already strong, will likely step it up a notch in 2004. Tampa Bay is ranked first in Florida for retail sales and grocery stores, drugstores and specialty retailers continue to expand in this market. Banks and restaurant chains also are actively pursuing sites.
— Paula Buffa, CCIM, Advantis GVA, Tampa, Fla.
“In south Texas and the Rio Grande Valley, tourism, retail trade, NAFTA, and agriculture are the main economic drivers. The economy is great overall; however, the proposed U.S./Mexico exit/entrance visa could have some devastating effects if passed. This single piece of legislation could totally derail the U.S. economy. It is not just a border issue; the effects are far reaching and will be felt nationwide.
“Office space for service providers, small showroom warehouse space, and retail are all in demand and availability is in short supply. We have been experiencing a steady and somewhat controlled economic growth for the past several years. I believe the trend will continue. Large industrial warehouse space may underperform, as companies downsize and jobs are going to third-world countries.”
—Charles Marina, CCIM, CRB, GRI, First American Realty Co., McAllen, Texas
“The main economic driver in metropolitan Denver is jobs, with special emphasis on income levels per household of job growth, and net in/out migration, especially as it relates to immigrant and Hispanic growth. Additional drivers include absorption, building permits and completions, age growth, housing starts, and office vacancy. I expect the market to generally flatten (or remain flat), solidifying at the bottom with a beginning trend toward positive market growth by the start of fourth-quarter 2004.
“Sectors I assume will excel include multifamily and office due to the intensive focus our mayor and economic council are putting on job growth. The expectations are that office vacancy will diminish, fueling a lowering of vacancy in the multifamily sector. Retail and light industrial will underperform due to the natural lag they have in following growth.”
— James Karo, CCIM, James C. Karo Associates, Golden, Colo.
“The San Francisco area economy is very diverse, with a sustainable blend of government, transportation, construction, technology, tourism, and retailing. We anticipate that 2004 will be slightly better than 2003 in terms of job formation and economic base growth. There is a large redevelopment pipeline in the interior areas of the region, like Oakland, as well as several public/private mixed-use transit-oriented developments near the BART stations.
“We expect that multifamily and retail investment will continue their most-favored status in our market for 2004. The strongest asset class will continue to be apartments as the supply of capital is overwhelming the available product on the market. Capitalization rates are in the 6 percent range, with some sales even yielding into the high-5 percent range, largely a function of the attractive debt market.
“We expect that office buildings will continue to be challenged with a lot of vacancy, sublease space, and slightly falling or stable rents. As the technology industry returns, the East Bay office market will benefit significantly, since we have the largest concentration of biotechnology and entertainment-technology companies, as well as a healthy share of software engineering firms.”
— Richard G. Knutson, CCIM, Moison Investment Co., San Leandro, Calif.
“San Diego's main economic drivers are high capital demand in a barrier-to-entry market. Population growth is predominantly natural birth, and job growth has slowed significantly; yet 2003 experienced a surge in purchase prices and a resulting drop in capitalization rates in all market sectors. In 2004, I expect the capital markets to begin the process of finding a new ‘prettiest girl at the dance' as other investments build impressive track records and the interest rate scenario becomes more vulnerable to post election increases. I believe San Diego investment property will begin to flatten the rent/appreciation curve while increased operating expenses will result in lower cap rates.
“Condominium conversion of existing apartment complexes will continue to fuel multifamily activity. The most noteworthy trend I see is the "not in San Diego" mantra being chanted by tenancy in common broker/dealers. The theory is that San Diego is a seller's market and owners are best served to sell their management-intensive apartments at the top of the market and invest in tenancies in common (to preserve 1031 exchange benefits) that are professionally managed in other areas of the country that produce higher cash-on-cash returns. The number of apartment listings is growing, and time to contract is growing.
“I think the apartment market is very vulnerable. True cap rates are lower than stated because of underestimated expenses. With prices per unit averaging in the low $100,000s and rents flattening, it is hard to feel confident about hitting cash flow requirements, let alone a significant growth in residual value.”
— Chuck Wise, CCIM, IPC Commercial Real Estate, Carlsbad, Calif.
“Services, the military, defense-related research and development, and high-technology manufacturing are the primary employers in Albuquerque. As employers look for more effective labor forces in cities with lower living costs, we expect to see significant increases in defense-related R&D spending in Albuquerque. Several manufactures have unveiled plans for major expansions, so we anticipate a net increase in economic base jobs and a resultant positive rippling effect throughout our economy. Increasing levels of federal government spending — particularly as relates to defense and homeland security projects — should continue to be a boon in 2004 to the Sandia National Labs in Albuquerque and the Los Alamos National labs located just north of Albuquerque.
“To the extent that low interest rates hold, the demand for larger multifamily projects should remain exceptionally high. Although the divestiture of property by national real estate investment trusts in secondary markets such as ours has created a steady supply of product — demand still substantially outpaces supply. Further heightening the demand for multifamily properties is the combination of steadily decreasing vacancy rates and increasing rental rates; occupancy rates continued to improve, climbing to 92.1percent in third-quarter 2003 and rent rates continued into their third year of 1 cent per square foot monthly annual increases.”
—Daniel H. Boardman, CCIM, NM Apartments, Albuquerque, N.M.
“Honolulu's major industries are tourism, military, and construction. All will do well in 2004. Tourism is on a slow and steady rebound; mainland United States visitor counts are up, while international visitor counts (90 percent Japanese) are still slow. Fortunately, the mainland visitors are more than offsetting the Japanese. Also, our small cruise ship industry is growing at an enormous pace.
“We have major bases for each of the four branches of the military. Federal expenditures are up and will continue increasing in the near- to mid-term, mostly due to a massive military housing privatization and reconstruction effort and secondarily due to reconstruction and expansion of base infrastructure. There are also potential increases in the military presence (meaning more federal money) on the horizon.
“Private residential housing construction is booming with several high-rise condominiums breaking ground and several others announced. Suburban housing construction is also very strong. Industrial market (consisting mostly of distribution warehouses) rents are on the rise and speculative construction is underway. Retail construction continues to expand. Office and hospitality sectors are the slowest. Noteworthy transactions include the sale of the Damon Estate for $480 million. This was a bulk sale of nearly 200 properties, mostly leased-fee interests under industrial buildings. The 345,000-square-foot, class A Davies Pacific Center in the central business district and the 204,000-sf, class B Pan Am Building in the suburbs sold.
“Barring any geopolitical shocks, none of our markets will underperform this year. Hawaii's economy is finally rebounding after a decade of sluggishness. The weakest sector will be office; however, it appears as if positive absorption began in third-quarter 2003. The year-end tally should confirm market-wide positive office absorption. Hotels are the next weakest; however, owners are reinvesting and renovating properties, and several traded hands in 2003.”
— James M. Brown, CCIM, Hawaii Commercial Real Estate, Honolulu
“Overall, the greater San Francisco Bay Area currently has over 106 million square feet of vacant office, flex, lab, and research and development space, with the majority of this space located in Santa Clara. Alameda and Contra Costa counties were particularly affected by the dot-com boom, which caused rental rates to skyrocket to 200 percent to 300 percent of rents two years previous, which triggered significant new construction and renovation of warehouse and other products into office space. When this market collapsed the problems were exacerbated by the increasing trend of corporate America to get more out of less through increased use of technology to boost productivity, as well as the global offshoring that has transferred hundreds of thousands of jobs to lower-cost locales.
“Dec. 1, 2003, marked the bottom of the Bay Area office market, and although we still expect major blocks of additional office space to be returned to the market during 2004 due to continuing corporate layoffs, we expect a dramatic increase in leasing from the under-20 employee segment. Software is beginning to come back, and consultants in almost every category, as well as industries related to the health industry, show positive trends for 2004. Mortgage, residential real estate, real estate lending, and title companies may be expected to cut back next year and on into 2005 as the rapid explosion during the past three years due to the lowest interest rates in 40 years has come to an end.”
— Jeffrey S. Weil, CCIM, Colliers International, Walnut Creek, Calif.
“In Alameda and Contra Costa counties , I see tech coming back slowly. Prices were so high with virtually no space available just a few years ago as compared with our present situation with record low rents and plentiful available space for purchase or lease. A few years ago businesses were leaving the area because everything was so expensive; however, the rents have dropped considerably, making this area very affordable. The other area that could contribute to growth in our economy is the improvement of the Japanese and Chinese economies, which may help our import/export business increase demand for warehouse space. Our West Coast location and availability of cargo ship loading and unloading facilities may help this area.
“The warehousing sector will see that most rapid turnaround driven by the import/export demand on space . Office leasing is lagging in our market, still feeling the effect of the slow job growth and to some degree by offshoring of tech jobs. Office vacancy rates are in the low 20 percent range and leasing rates are way back to pre-boom numbers. I expect we will continue to suffer from lack of demand for office space through most of 2004. On the other hand, if you need office space in the Bay Area now is a good time to enter into a lease.”
— Len Magnani, CCIM, Lee & Associates, Pleasanton, Calif.
“The bullish trend in the Baltimore/Washington, D.C., corridor's investment sales market continued through 2003. Private capital continued to be more active than institutional capital in acquiring real estate and currently dominates the bidding for assets worth less than $10 million. Tax-deferred 1031 exchange buyers are often coming out at the top of the bidding, paying prices that are leaving the competition scratching their heads as capitalization rates fall to record lows. Sophisticated would-be sellers see that a window of opportunity is open, yet they are wrestling with a challenge that is becoming more difficult to address: where to reinvest sale proceeds to come even close to matching the returns they are currently collecting.
“Today there is no asset that will not attract multiple bids and a virtual auction, but the most sought-after assets in the corridor are high-bay industrial, grocery-anchored retail, and multifamily. Office and flex buildings are suffering by comparison because of the weakness in the leasing market. Leasing experts feel we have hit bottom, and demand from tenants for office and flex space in the corridor will only improve in 2004.
“Tremendous constraints to new development in the corridor make it very attractive to buyers of investment property of any type. There is little land available for new development and even tax-deferred exchange buyers who overpay can hardly go wrong buying a building between Baltimore and Washington in the long run.
“While there is no reason for alarm, there is reason to tread cautiously in 2004. Office and industrial commercial real estate in the corridor is overbought and may be due for at least a modest pullback soon. No crash is imminent, as lenders have wised up since the last market downturn and have set tighter caps on leverage.”
— Christopher B. Kubler, CCIM, NAI KLNB, Columbia, Md.
“Over the past two years the apartment market within the greater Toronto area has entered into a period of transition. Values have continued to rise, but at a much slower rate than in the past. Demand for apartment product, while still strong, has been reduced. Optimism in the market has declined and many investors see short- to medium-term risk in the apartment market segment.
“This new perspective has come about for a variety of reasons. Since the introduction of the Tenant Protection Act, many apartments have turned over and many buildings are approaching market rental levels. As net income levels become maximized, upside potential is limited. Also, competition from homeownership because of low interest rates and cheap housing has led to a reduction in demand from existing and new potential renters. The result has been an increase in vacancy in the past few years from below 0.5 percent to over 3.5 percent. This reduction in demand has caused rents to drop and has led many landlords to offer incentives to new tenants and even to existing tenants. Investor condominiums have increased and are expected to grow in supply in the coming few years, further increasing competition in the rental market.
“There are signs of a shift within the apartment market. Some owners are still anticipating higher growth and value increases in the short term. However, most investors are anticipating lower rent increases, higher vacancy, increased taxes and utility costs, more rental incentives, and potential negative changes to existing legislation. Purchasers are not as aggressive in pricing as in the past. This being said, low interest rates and a relatively strong economy are positive features. As the apartment sector is based on leverage, low interest rates currently continue to fuel demand. How long this well last is anyone's guess.”
— Neil H. Warshafsky, CCIM, Re/Max Commercial Focus, Toronto
“Waterloo, Ontario's economic growth flourished in 2003. The 20 percent raise in the Canadian dollar had a strong effect on the manufacturing sector, with some negative impact on exporters. Significant employment gains were experienced in the high-tech and automotive industries in both Waterloo and Cambridge. The residential boom continued, with record-level housing starts and a boost to furniture and home sales. The positive economic trend in the Waterloo region is expected to continue into 2004, yet at a slower growth rate than last year.
“Downtown office demand in Waterloo was active in 2003, driven by customer service firms, followed by insurance and high-tech companies. Limited class A office space attributed to the continued demand for class B space, where slightly reduced lease rates were asked for quality office buildings. Vacancy rates increased slightly because of space rationalization by tenants. Asking net rents marginally decreased because of increased competition between class A, B, and C buildings attempting to attract and maintain existing tenants. Limited new construction in the downtown market will continue in 2004. Suburban office leasing was steady in 2003, with increased activity from companies in the high-tech sector. New construction in the pipeline will release an additional 390,000 square feet to accommodate the demands of high-technology tenants. Vacancy rates are expected to increase in 2004 because of the new supply being added to the market.
“The Waterloo industrial market experienced steady activity in 2003 with modest increases in demand for light manufacturing and industrial space, contributing to a positive absorption in the last half of the year. This trend is expected to continue in 2004 as new industrial tenants continue to move into new space and increased speculative construction occurs. Availability rates are expected to remain stable, marginally increasing from 5.9 percent in 2003 to 6 percent in 2004.
“The Waterloo retail market experienced increased consumer confidence and spending in 2003 as the residential housing boom increased retail sales for furniture and big-ticket items. Well-anchored retail space in close proximity to larger chain destination stores received strong demand in 2003. In Kitchener and Waterloo there was strong leasing activity close to university student housing areas and along the perimeter of the cities. New retail development in downtown Guelph countered attraction to the suburban market.
“Investment in Waterloo was steady over 2003, with increased demand for multifamily assets. Investment in the student housing market, followed by shopping centers and industrial portfolios, continued to define the majority of activity. Reduced interest for office building and retail strip outlets resulted in few investment transactions for those asset classes. Institutional investment continues to account for almost 40 percent the investment market. Limited supply of quality investment product will cause flat investment activity in 2004.”
— Mel de Oliveira, CCIM, CB Richard Ellis, Kitchener, Ontario