Market forecast

Market Forecasts

Learn what CCIMs across the country expect to happen in their markets.

Nationally, the office market should pick up in the second half of 2004 with the vacancy rate declining from first quarter's 17.9 percent to around 17.2 percent by year-end. Absorption through the remainder of the year should total around 25 million square feet. Asking rental rates are likely to end the year slightly lower, although concessions already are beginning to diminish in the most desirable buildings and submarkets.

Nationally, the central business district vacancy rate is nearly 400 basis points below the suburban rate (15.4 percent versus 19.3 percent). CBD construction totals 1.4 percent of current total inventory versus 1.1 percent in the suburbs. The suburban construction pipeline has emptied out more thoroughly, andthe suburbanvacancy rate should decline more briskly than the CBD vacancy rate in the next few quarters. However, CBD construction above 1 million sf is a factor in only five markets: Washington , D.C. , Chicago , New York , Boston , and Philadelphia .

The office-using sectors of the economy -- information, financial activities, and professional and business services -- are growing again, creating 323,000 new jobs year-to-date through May. While part of this demand isbackfilling shadow space (empty space not being marketedfor lease or sublease), it should be enough to generate moderate to healthy absorption totals through the remainder of 2004.

All four of the core property categoriesremain hot, but as interest rates rise, newer,well-leasedproperties in primary markets should hold their value better than older properties with tenant rollover issues. Demand is especially strong for value-add opportunities, in which buyers can acquire problem properties, renovate them if necessary, lease them up, and sell at a profit. With interest rates rising, passively held properties might see their values drop and capitalization rates rise, at least for all but the most sought-after class A assets where investor demand may prop up values.
-- Stan Mullin, CCIM, SIOR, Grubb & Ellis, Newport Beach, Calif., and Robert Bach,Grubb & Ellis' head of research in Northbrook, Ill.

Wilmington , Del.

Wilmington 's office market of approximately 12.5 million sf in 155 buildings will remain somewhat flat during the second half of the year. The first half saw 450,000 sf in leasing activity, which is not bad, but two of the transactions comprised 310,000 sf. This leaves a relatively small 140,000 sf remaining for the balance of the leasing activity in the entire market. While the number of tenants looking at space has increased slightly,there is still a shortage of actual signed leases.

Although the amount of space available is approximately the same in the CBD and suburban markets, downtown has been getting the bulk of recent activity. However, 10-year averages favor the suburban market: 498,890 sf to 312,457 sf.

Wilmington 's office market is dependent on the economy and is a good exampleof the jobless recovery. For instance, credit card companies, which make up the largest component of the employment base, are flat and have been for the past nine to 18 months. The balance of corporations that have a presence in Delaware also are holding back on commitments to lease additional or new space.

The office segment has been the most active for investors over the past three years, but it has slowed.Right now industrial product has the most upside potential, but it has a 15 percent vacancy rate across the board in all property types and submarkets, which will keep sales activity down.
-- Pete Davisson, CCIM, SIOR, Jackson Cross Partners, Wilmington

New Orleans

Although New Orleans ' economy has become less dependent on the oil industry, it still is the primary market influence on the city's office sector, and as consolidations within the industry continue, the decline in national oil companies' presence is having a negative affect. The good news is that small to medium-size companies are taking over a large amount of the in-shore oil business. Further, New Orleans ' healthy tourism market is prompting developers to convert many functionally obsolescent office buildings into hotels. The port and maritime industries are expanding with large contracts being announced for both military and commercial shipping interests. The local high-tech industry also is growing due to large military contracts.

Of the office market's estimated 600,000 sf of sublease space, approximately half of that has been backfilled. Suburban New Orleans ' office market should see slight decreases in vacancy with some possible upward pressure in rents by year-end, advancing rates 50 cents per square foot to $1.00 psf. The CBD will see slight increases in vacancy, and rates should hold steady around $15 psf.

Retail is the hottest investment property, followed by multifamily. Office and industrial continue to lag, although if vacancies decrease, investors will have opportunities to purchase properties at lower net operating incomes, which should show higher upside in the next five to 10 years.
-- Richard E. Juge, CCIM, SIOR, Re/Max Commercial Brokers, Metairie , La.

Tampa , Fla.

There are already positive signs that Tampa 's suburban office submarkets, particularly Westshore, are experiencing recovery. Lease rates are increasing to pre-recession amounts, and vacancy rates are declining. The submarkets are recovering more quickly than the Tampa CBD due to the available amenities in these areas, such as free parking. (Only two buildings in the Tampa CBD offer this convenience.) A submarket's location relative to the airports -- Tampa International and St. Pete/Clearwater Airport -- is a key factor to its recovery. The easy access to travel from greater Tampa Bay is important to corporate leaders opening offices in this area.

Tampa 's CBD is showing some absorption, and residential development is helping convince people that living downtown is a positive experience. Downtown Tampa will be the place to work for people who want to live the urban lifestyle when all of the residential development comes on line in about three years.

Economic factors aiding recovery are continuing corporate relocation and the increase in a college-educated work force from the local institutions including University of South Florida , University of Tampa , and Stetsen University College of Law.

Institutional investors looking for short-term gains will look at the suburban submarkets, since they are showing recovery at this time. Long-term investors will include the CBD. At this time, high prices are keeping private investors on the sidelines for the most part.
-- Steven Hughes, CCIM, Denholtz Associates, Tampa , Fla.

Palm Beach County , Fla.

In southeast Florida , specifically Palm Beach County , the office market is strong, regardless of potential interest rate increases. Factors affecting continued growth are increasing occupancies, stable rental rates, strong demand, and users' belief in the local market. Suburban office is stronger with tenants because of the markets' proximity to highways and homes. For a small group of CBD developers/investors, certain downtown office properties will be in demand with limited availability.

Investors currently favor retail properties because of high occupancy and rental rates, as well as pent-up demand.
-- Bill Kohlhepp, CCIM, Marcus & Millichap, Fort Lauderdale , Fla.


Cleveland 's downtown office sector continues to struggle as the vacancy rate has climbed to 22 percent for class A and B buildings. Mergers, acquisitions, bankruptcies, and a lack of employment opportunities have created a challenging market.The addition of a new federal courthouse also increased unused space as government offices vacated older buildings for the new building. Absorption over the past two years has been negative. Most of the activity has centered on the expansion of Cleveland-based companies rather than a move of companies from other markets. However, the city should continue to see more internal growth that will absorb space.Although the suburban markets also are experiencing higher-than-normal vacancies, their vacancy rates are slightly lower. New construction is minimal, so more space should be filled to accommodate growth.

Due to these concerns, investors are focusing more on apartments, retail, and single-tenant net-leased buildings.
-- Vicki Maeder, CCIM, CB Richard Ellis, Cleveland


Indianapolis will experience slow recovery in the second half of this year.Vacancy rates should fall by .5 percent to 1 percent. Consolidations and mergers continue to hamper the office market, such as Galyan's recently announced closure of its 100,000-sf headquarters in Plainfield due to its acquisition by Dick's Sporting Goods.In addition, layoffs continue to offset anyjob gains from the recent national recovery.

The downtown vacancy and lease rates should recover more quickly due to a lack of new construction and planned condominium conversions of class B and C office buildings (which will remove these properties from vacant office inventory).

Investors are likely to favor retail first, thenindustrial properties.Office and apartment buildings are not hot investments right now.
-- Samuel F. Smith II, CCIM, Meridian Real Estate, Indianapolis


Minneapolis-St. Paul's office market vacancy rate is at 16 percent, and vacancy rates including subleases is at 18.5 percent. The vacancy rate is beginning to level off, and the market should regain health in the second half of 2004. The forecasted increase in new jobs will help absorb the office space vacancies. To meet the demands of increased staffing, small to mid-size companies will take up most of the space, while larger companies will begin to fill their existing shadow space.

The suburban office market is healthiest due to a number of contributing factors. First, there is less available suburban office space. Also, more decision makers live and work in the suburban market. Finally, many large corporate users in the CBD have built their own facilities, which has taken them out of the multitenant market.

Medical office buildings will remain the strongest performers in the office sector. The medical office supply has seen tremendous growth over the years, and this trend should continue.
-- James Damiani, CCIM, SIOR, Welsh Companies, Minneapolis

For the remainder of 2004, Minneapolis ' office market will be at least twice as active as in the first half of the year. Corporate real estate executives finally are getting the signal to expand, and the companies are realizing that future growth only can come through acquisition or new facilities.

Both suburban and CBD office buildings have been experiencing difficulty in the Minneapolis-St. Paul market over the last few years. The suburban office sector will improve first, during the second half of 2004, with the CBD recovering in 2005.

Underperforming office buildings will become very attractive to investors during the second half of this year. A number of class B office buildings at 50 percent to 75 percent occupancy are available at or under replacement costs. This vacant space should be absorbed during the next 18 to 24 months.
-- Charles R. Henrich, CCIM, Spectrum Development Group, Eagan , Minn.

Lincoln , Neb.

Lincoln 's office leasing activity seems to be improving. Speculative buildings constructed during the early part of this decade hit a slump but slowly are filling up. Well-priced class B space that is well wired for data or recently renovated is doing well. The CBD will have some space absorbed by the Nebraska government the second half of this year. The market currently has a shortage of large office space -- there is not much product available greater than 20,000 sf.The market also is unable to fill requests for industrial developments requiring a large amount of acres.

No particular factor can account for improved office absorption. However, businesses that previously were hesitant to expand are doing so now. Little spec office space has come on the market, except for very small buildings -- 10,000 sf or less. Healthy industries such as banking, insurance, and medical probably absorbed a lot of space.

Retail continues to be fairlyhealthy, though the discounters are performing better than the upscale retailers. A new Wal-Mart was built in south Lincoln , and the submarket is expected to explode. Auto dealers vacated alarge area in the central retail corridor, which is in the process of being declared blighted; this retail area is bottoming out and should see some new development soon. An antigrowthcity council is pushing residential lot prices to unprecedented inflationary levels, which also will have a positive ripple effect on commercialdevelopment, as long as the attitude doesn't drive businesses out of town.

The CBD has been healthy due to the city, county, and state governments' presence and the University of Nebraska . Certain companies such as law firms, lobbyists,and banks like to locate near the courthouse and the capitol building. The trend in past years toward more efficient use of office space might put downtown at a disadvantage. A 5 percent improvement in suburban vacancy wouldn't be surprising, but that much of a change in downtown's vacancy rate by the year-end is doubtful.
-- Robin Eschliman, CCIM, NAI FMA Realty, Lincoln

Bismarck , N.D.

The Bismarck office market will be lackluster in the second half of this year due to increased e-mail and computer server capacity, which allow individuals to work from home. The CBD office market remains weak, but the suburban class A office sector will continue to grow. Little demand for class B and C properties exists.

Industrial is the strongest investment sector due to increased need for distribution and small industrial supply houses. Also, urban industrial occupancy is high, and little new construction is in the pipeline.
-- Skip Duemeland, CCIM, Duemelands Commercial, Bismarck

Albuquerque , N.M.

Albuquerque 's office market will continue to be relatively flat with continued negative absorption in the downtown and southeast submarkets and slight increases in the north Interstate-25 and uptown submarkets. Three new spec office products totaling approximately 90,000 sf will come on line in the north I-25 submarket and will be quickly absorbed over the next six months. The flight of substantial General Services Administration tenants from the CBD and airport submarkets to northern suburban submarkets will continue. The shift from mid-rise to walk-up properties will continue to benefit the suburban markets for the next 12 months.

Investors will continue to focus on well-located single- and two-story walk-up product with parking availability. The traditional mid-rise property will continue to devalue with flat rents and increasing operating expenses. The excess of capital chasing product will keep cap rates low for office properties with average occupancy and long-term leases. The lack of investment properties is forcing certain investors to overpay for exchange properties, keeping overall office sale prices from dropping with the flattened returns.
-- David A. Genrich, CCIM, Real Estate Advisors, Albuquerque

San Francisco Bay Area

Overall, the greater San Francisco Bay Area currently has 106 million sf of vacant office, laboratory, and research and development space available, with the bulk of this (56 million sf) available in Santa Clara County . Submarkets vary throughout the Bay Area in terms of vacancy rates, rental rates, and market velocity, but overall very few tenants are seeking new space in excess of 10,000 sf, while the small-tenant market in the 2,000-sf to 10,000-sf range is particularly dynamic.

A number of factors are contributing to the current office market sluggishness. Corporate downsizing continues due to greater technological efficiencies and companies shifting operations out of the high-priced California environment to low-cost-of-business states. Global offshoring is another element, which in a number of cases has caused existing tenants to terminate 100,000 sf or more.

Owner/user sales of vacant buildings is one bright spot in the San Francisco Bay Area office market. Low available interest rates make purchasing a property an attractive proposition to investors. The investment sales market, particularly when there is a credit tenant with a long-term lease in place, is very hot with multiple offers and record-setting prices for quality office product in some of the more dynamic submarkets.
-- Jeffrey S. Weil, CCIM, Colliers International, Walnut Creek , Calif.

San Diego
In the San Diego area, office absorption should increase in the second half of 2004 as remaining quality sublease space has been absorbed in the past six to nine months. The primary economic factor affecting recovery is growth in the diversified business sectors of San Diego 's economy. Institutional buyers continue to express interest in quality office properties as demand for office space remains strong and lack of developable land increases future development costs. Demand for quality space continues in both the downtown and suburban sectors. The overall countywide office vacancy rate is 11.5 percent, and absorption for 2004 should be approximately 2 million sf.
-- Michael Dyer, CCIM, Burnham Real Estate Services, Carlsbad , Calif.

Winnipeg , Manitoba

Winnipeg 's office sector will have slight positive absorption during the next year. The suburban market has less spec space and ample parking, and the southwest quadrant should see a lot of small space occupied. The northwest airport area still has room for conversion to low-density office. The CBD has a fair amount of shadow space and new opportunities. In 2006 a more-than-600,000-sf hydro building will be built in downtown Winnipeg , which will create vacancy in the southwest and CBD areas.

Retail continues to be a strong investment choice, with new formats coming to our area. The industrial investment sector is flat, and the multifamily sector has a shortage of supply to create an investment market.
-- Sandy G. Shindleman, CCIM, Shindico Realty, Winnipeg


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