Market Data

Southern Revival

After a tumultuous year, this region comes back to life.

Even though much of the South Central region has recovered from last year's weather-related catastrophes, sections remain devastated. The New Orleans metropolitan statistical area's population has diminished by more than 300,000 according to NAI/Latter & Blum. Although some areas of the city still have no electricity, the status of the industrial sector is optimistic. The area's post-Katrina industrial inventory is about 3.51 million sf, the lowest since Dec. 2000. Demand for industrial space from Federal Emergency Management Agency contractors, communications and construction companies, and others helping to rebuild mounted up after the storm but many of these tenant leases are only for one to three years.

In Birmingham, Ala., multifamily occupancy is very high and rents range from 50 cents to slightly more than $1 psf, according to Southeast Real Estate Business. There is very little construction due to high barriers to entry in the market. That along with condominium conversions has created a tight market with very little rental space available. New development is occurring in the downtown, midtown, and Highland Park submarkets. The Mobile, Ala., multifamily market also saw some action this spring with the sale of the 252-unit Arlington Park apartment complex for $22.4 million to Eagle Realty Group of Cincinnati, according to Birmingham Business Journal.

In San Antonio, speculative office construction has increased with positive absorption. The city has experienced positive absorption throughout the past two-and-a-half years including more than 663,151 sf in the past year, according to Grubb & Ellis. Rents have increased over the past several quarters as well, reaching $17.90 psf for class A in 1Q06. New construction, including 150,440 sf, in the North Central submarket alone, will help house the market's growing workforce.

In the retail sector, Little Rock, Ark., has been performing well. Along the I-430 corridor, retail neighborhood centers are being developed. Three lifestyle centers are under construction in the market, according to NAI Global. Development in the central business district also is occurring due to the Clinton Presidential Library and Museum, which opened last year.

The $50.4 million Hilton Skirvin hotel in Oklahoma City is slated to open in 2007. Originally built in 1910, the property will be managed by Milwaukee-based Marcus Hotels and Resorts. Approximately $18 million in funding through economic development initiative grants, Environmental Protection Agency brownfields loans, tax increment financing bonds, and other means are helping to bring the project to completion. The hotel is located downtown and will complement the Bricktown entertainment development, according to OKC.gov.

Despite the devastation that 2005 brought to much of the South Central region, several commercial real estate sectors have perked up over the last year. As the one-year mark since Hurricane Katrina approaches, now is a good time for commercial real estate professionals to evaluate what may happen to both the markets hampered by the hurricane and the markets that absorbed the displaced tenants and businesses.

DALLAS
Texas-Size Mixed-Use Development

Including 12 million sf, 4 million of which will be office and retail, the Victory Park development in downtown Dallas is one of the largest planned urban developments the region has ever seen. Based around the American Airlines Center, a sports, entertainment, and performance venue that attracts more than 3 million visitors per year, the development features retail, dining, class A office, 4,000 residential units, a W hotel, and entertainment, and aims to become a link between downtown and the affluent Turtle Creek and Uptown districts. Victory Park represents a more than $3 billion investment and is privately owned by Dallas-based Hillwood Capital and Hicks Holding.
Photo caption:The House by Starck and YOO is one of several Victory Park residential buildings. Planned for completion in 2008, this 26-story, $80-million property will contain 150 residences and 30,000 sf of retail space on the ground level.
Photo credit: The 7th Art

ALBUQUERQUE, N.M.
Office Bounces Back

After a four-year rut, Albuquerque's office market experienced absorption of more than 50,000 sf due to Sento Corp.'s leasing of space in the Compass Bank building, according to Grubb & Ellis. While this may not be evidence of a complete downtown turnaround, it is the first positive absorption in years and is considered a step in the right direction.

Construction increased at the end of last year, primarily in the North I-25 submarket, which now offers more office space than downtown according to the New Mexico Business Journal. Additional development is not expected as traffic issues and increasing construction costs discourage developers. Deals will be available in the downtown area as it recovers from several businesses leaving for suburban office space over the past few years, according to NMBJ.

At the close of 1Q06, vacancy rates stood at 13 percent but were expected to fall as the year progresses, reports NMBJ. Rental rates will remain stable around $18.40 psf for downtown class A space and $14.07 psf for downtown class B space according to Grubb & Ellis.

A new retail lifestyle development in the Uptown submarket, ABQ Uptown is expected to encourage development in the area. Phase one of the 350,000-sf complex is scheduled for completion in June, according to the International Council of Shopping Centers.

EL PASO, TEXAS
Retail Rising

Lots of activity has characterized the El Paso retail market so far this year. Central El Paso has the multimillion dollar renovation of Simon Property Group's 1.1 million-sf Cielo Vista Mall. To keep up with a growing population, new retail development is occurring on the east side of town where the 450,000-sf El Paseo Marketplace is under construction. Anchored by a SuperTarget, the center is expected to open nearly fully leased, says Brett C. Preston, CCIM, partner with RJL Consultants in El Paso. New retailers are increasingly entering the market and rents have surpassed $20 psf, according to Richard Amstater, also a partner with RJL Real Estate Consultants. Still, few national restaurant chains or mixed-use projects have moved into the market, but retail in El Paso will continue to grow at a steady pace.
Source: Texas Real Estate Business
Photo caption: The 10,800-sf Ram Plaza in El Paso is one of several retail projects built this year in anticipation of the nearly 20,000 troops expected to move into Fort Bliss.
Photo credit: River Oaks Properties

BATON ROUGE, LA.
Post-Katrina Influx

In the days and weeks following Hurricane Katrina, Baton Rouge absorbed close to 200,000 New Orleans evacuees and 50,000 to 70,000 of them are expected to stay permanently, according to NAI/Latter & Blum.

In the office sector, nearly all of the city's vacant class A space became occupied within two weeks of Katrina, and class B office space vacancy declined to 9 percent. Many of these new tenants signed six-month leases, so long-term effects on vacancy rates are yet to be determined.

Displaced businesses also looked to Baton Rouge for industrial space. Industrial vacancy was reduced from 11 percent to 5 percent within two weeks of Katrina. Since the initial demand, activity has quieted down but speculative construction has begun to move in. Two new warehouse projects - 180,000 sf and 200,000 sf - were announced in February.

Retail activity also has increased since Hurricane Katrina. Occupancy may creep lower as the year progresses, but stands at 87.5 percent as of this spring. Three lifestyle centers, two power centers, and a mixed-use Whole Foods-anchored town center are in development. New retailers entering the market this year include Kohl's, Costco, Pottery Barn, Fresh Market, Cabela's, and Bass Pro Shops.
Source: NAI/Latter & Blum

PHOENIX
Multifamily Mercury Rising

• Phoenix is expected to perform well in the apartment sector throughout the year, partially due to job growth of 4 percent.

• Most new construction will be in the outlying areas of northwest Phoenix, Mesa, Gilbert, Chandler, and Ahwatukee. Approximately 5,300 new apartments will complete by year-end, a 13 percent decrease from the 2005 total.

• Effective rents are expected to rise 6.4 percent to $688 per month.

• Condominium conversions will continue: 4,000 units were sold for conversion last year, reducing the market net supply by 3,200 units.

• Cap rates average between 6.0 percent and 6.5 percent and are still higher than West Coast markets.

• Central and east Phoenix, where there is limited land for development, are growing increasingly attractive to investors.

Source: Marcus and Millichap

INTERNATIONAL BEAT
Big Deals in Russia

Investor interest in Moscow's retail and warehouse markets is strong, according to a recent DTZ Research report. Last year proved to be a growth year for the investment segments. Russia-based LigaStroyProject purchased the approximately 9 million-sf Europark retail center in Moscow for somewhere between $140 million to $170 million, according to NAI Miami's 2006 Global Market Report.

In the industrial sector, United Kingdom-based Raven Russia Ltd. acquired a partially completed 1.28 million-sf warehouse for $110 million. Upon completion the Krekshino warehouse will be approximately 3.2 million sf. Raven Russia plans to invest approximately $900 million in the Russian commercial real estate market.

HOUSTON
Office Outlook
Experts expect Houston's office market to continue to fare well throughout the year. Growth in the energy sector and displaced tenants from Hurricane Katrina are feeding the leasing market, according to Marcus & Millichap. A steady gain in population is predicted to last decades, and 600,000 jobs are expected to be added to the market during the next 10 years. Investor interest in office properties also will continue to flourish, according to Colliers International.

Office Fundamentals

BILOXI, MISS.
Casino Comeback

The IP Hotel & Casino, the Isle of Capri Casino Resort, and the Palace Casino Resort, all in Biloxi, managed to rebuild and open in time to ring in the new year, earning a combined $64 million in gross gambling revenue during their first full month of operation. During the same month a year earlier, nine casinos earned $90 million, according to The Sun Herald. Six more casino hotels are expected to reopen by the end of the year. Several of these properties are taking advantage of rebuilding to upgrade and expand their offerings.

TUCSON, ARIZ.
Retail Therapy

Rapid growth in the Tucson metropolitan statistical area during the past few years has left retail developers scrambling to keep up. While completions of new retail space should total 800,000 sf this year, a decrease from 1 million sf in 2005, several large developments are in the pipeline. The largest, the Passages of Tucson, is planned for 300 acres along the booming I-10 corridor and includes more than 2 million sf of retail, 1.5 million sf of residential, and 800,000 sf of office. Other new development is mostly grocery- or big-box-anchored neighborhood centers, nearly half of which is along the I-19 corridor south of Tucson's central business district.

Vacancy rates are expected to fall 10 basis points to 9 percent this year due to the decrease in completions and steady absorption. Low vacancy will allow effective rents to rise 3 percent throughout the year to $15.33 psf across all submarkets.

Investors from higher-priced markets are drawn to Tucson's low maintenance single-tenant net-lease deals. Average net-lease cap rates have dropped below 7 percent and dollar volume for these transactions rose 60 percent last year. While in-state investors accounted for half of all transaction volume, out-of-state investors dominated larger NNN transactions such as drugstores. Tucson's retail investment activity is expected to remain strong throughout the year and well into the future.
Source: Marcus & Millichap

Carolyn Bilsky

Area report is written by Carolyn Bilsky, associate editor of Commercial Investment Real Estate. Contact her at (312) 321-4507 or cbilsky@cciminstitute.com.

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