Market Data

Cities Upon a Hill

These markets continue to rise above the recent credit crisis.

By Rich Rosfelder |

Industry experts have weighed in on what to expect in 2008, and it can be summed up in one word: aftershock. As commercial real estate markets across the country attempt to find their footing after seismic shake-ups in the residential and financial sectors last year, investors are expected to proceed with caution. Even traditionally reliable markets have begun to stagger, and these new challenges will not disappear quickly.

Despite this turbulence, some markets have been able to withstand – and even benefit from – the recent downturn. Several cities around the country are experiencing rapid population growth, solid job gains, strong tenant demand, and other phenomena that reinforce these markets’ foundations. While these cities may not all be sunny, they are attractive financial getaways for investors in search of solid ground. Each one topped its property sector list in a 2008 Real Estate Research Corp. ranking. See cover story, Financial Instability.

Salt Lake City: Office

With a job-growth increase of more than 3.5 percent in 2007 and a healthy start in 2008, Salt Lake City’s continued rising employment rate has bolstered the outlook for office properties this year, according to Marcus & Millichap. As more companies expanded and relocated within the metro area in 2007, office-using job growth was four times the national average, and developers responded in kind by bringing 1.2 million sf of new office construction on line last year. This more than doubled the 2006 rate and marked the most new development volume since 2001. However, as additional product entered the market, vacancy rates trended upward at the end of last year. Transaction velocity is expected to remain brisk this year in conjunction with capital appreciation driven by investor competition.

Source: Marcus & Millichap Office Research Report 3Q07

Kansas City, Mo.: Industrial

Longer renewal terms and more speculative construction in 2007 may have pointed to industrial landlord confidence, according to Cushman & Wakefield. Landlords, however, are not the only ones who expect a strong showing in the Kansas City, Mo., industrial market this year. During the four-year period from 2004-2007, net absorption exceeded 12 million sf with construction totaling 8 million sf, bringing overall vacancy down to 7.4 percent, reports Colliers Turley Martin Tucker. An estimated influx of speculative construction this year – the most since 2000 – underscores the market’s continued popularity. Development of the former Richards-Gebaur Memorial Airport has drawn national attention to the area, according to the Kansas City Business Journal. CenterPoint Properties is expected to deliver more than 300,000 sf of speculative distribution space on the site this year with several build-to-suit plans being discussed. As similar projects spring up in Kansas City, property managers are counting on the forecasted shift to a landlords’ market.

Source: Colliers Turley Martin Tucker Market Research 3Q07

Los Angeles: Retail

The Los Angeles retail market’s strong performance in 2007 should keep investors and buyers on the hunt, according to Marcus & Millichap. Investors will continue to gravitate toward single-tenant properties, while buyers’ enthusiasm for multitenant properties should remain healthy due to the recent stabilization of capitalization rates. Construction also is expected to be strong this year with an acceleration of deliveries, which includes the gigantic L.A. Live project. This pre-leased $2.5 billion, 27-acre sports, residential, and entertainment complex will add considerable retail space to the market. And though the delivery of new space is likely to push vacancy rates up this year, renter demand and revenue growth should keep Los Angeles retail in the black.

Source: Marcus & Millichap Retail Research Report 3Q07

Portland: Multifamily

While the residential slump has shone like a spotlight on the nation’s multifamily sector, the Portland market is expected to reap the benefits well into this year and beyond. In fact, the area’s apartment builders have approximately 1,700 apartments coming on line this year, according to Marcus & Millichap. Expected deliveries include the 244-unit Wyatt building and the 190-unit Ladd Tower, which were both originally planned as condominium projects. Investor activity also is forecast to remain steady as competitive cap rates draw them away from bigger West Coast markets. Investors may benefit from exploring Portland’s east side, where a groundswell of job growth is expected on the heels of a planned streetcar project, according to Marcus & Millichap.

Source: Marcus & Millichap 2008 Apartment Report

While these markets may offer stability to some investors in shaky sectors, they should not be regarded as definitive proof of a highly anticipated turnaround. Indeed, the fault lines remain, and the aftershock of last year’s residential and financial woes may continue to reverberate well into the foreseeable future. Commercial real estate will endure, but investors should be prepared to hold on and ride it out.