HIGHLIGHTS NORTH AMERICA WWW.COLLIERS.COM Q2 2013 | OFFICE MARKET INDICATORS Relative to prior period NORTH AMERICAN OFFICE MARKET Summary Statistics, Q2 2013 US Q2 2013 US Q3 2013* Canada Q2 2013 Canada Q3 2013* VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE** *Projected | **CBD Class A rents Construction is the change in Under Construction US CAN NA VACANCY RATE (%) 14.35 7.24 13.86 Change From Q1 2013 (%) -0.13 0.32 -0.10 ABSORPTION (MSF) 15.7 (0.3) 15.5 NEW CONSTRUCTION (MSF) 8.7 1.1 9.8 UNDER CONSTRUCTION (MSF) 58.7 17.0 75.7 ASKING RENTS PER SF US CAN Downtown Class A ($) 41.56 51.70 Change from Q1 2013 (%) 0.82 1.91 Suburban Class A ($) 26.44 32.29 Change from Q1 2013 (%) 0.41 0.33 Recovery Broadens Despite Headwinds ANDREA B. CROSS Office Research Manager | USA KEY TAKEAWAYS • The North American vacancy rate decreased for the sixth straight quarter, falling by 10 basis points to 13.86%. Improvement was entirely due to the U.S. office market, in which both CBD and suburban vacancy rates decreased. The Canadian vacancy rate increased in both CBD and suburban markets, although the Canadian office markets remained much tighter than the still-recovering U.S. office markets. • Net absorption surged to 15.5 million SF in Q2 2013, up from 4.0 million during Q1 2013. The resilience of the economic recovery despite tax increases and the federal government sequester in early 2013 had a positive psychological impact on tenants during Q2 2013. Sq. Ft. By Region Absorption Per Market (SF) Q1 2013 -Q2 2013 1,000,000 500,000 100,000 -100,000 -500,000 -1,000,000 2 billion 1 billion 200 mil. Occupied Sq. Ft. Vacant Sq. Ft. OFFICE VACANCY, INVENTORY AND ABSORPTION | Q2 2013 | NORTH AMERICA
Transcript
HIGHLIGHTSNORTH AMERICA
WWW.COLLIERS.COM
Q2 2013 | OFFICE
MARKET INDICATORSRelative to prior period
NORTH AMERICAN OFFICE MARKETSummary Statistics, Q2 2013
US Q2
2013
US Q3
2013*
Canada Q2
2013
Canada Q3
2013*
VACANCY NET ABSORPTION
CONSTRUCTION RENTAL RATE**
*Projected | **CBD Class A rents
Construction is the change in Under Construction
US CAN NA
VACANCY RATE (%) 14.35 7.24 13.86
Change From Q1 2013 (%) -0.13 0.32 -0.10
ABSORPTION (MSF) 15.7 (0.3) 15.5
NEW CONSTRUCTION (MSF) 8.7 1.1 9.8
UNDER CONSTRUCTION (MSF) 58.7 17.0 75.7
ASKING RENTS PER SF US CAN
Downtown Class A ($) 41.56 51.70
Change from Q1 2013 (%) 0.82 1.91
Suburban Class A ($) 26.44 32.29
Change from Q1 2013 (%) 0.41 0.33
Recovery Broadens Despite Headwinds
ANDREA B. CROSS Office Research Manager | USA
KEY TAKEAWAYS
• The North American vacancy rate decreased for the sixth straight quarter, falling by 10 basis points to 13.86%. Improvement was entirely due to the U.S. office market, in which both CBD and suburban vacancy rates decreased. The Canadian vacancy rate increased in both CBD and suburban markets, although the Canadian office markets remained much tighter than the still-recovering U.S. office markets.
• Net absorption surged to 15.5 million SF in Q2 2013, up from 4.0 million during Q1 2013. The resilience of the economic recovery despite tax increases and the federal government sequester in early 2013 had a positive psychological impact on tenants during Q2 2013.
Sq. Ft. By Region
Absorption Per Market (SF)Q1 2013 -Q2 2013
1,000,000
500,000
100,000-100,000
-500,000
-1,000,000
2 billion
1 billion
200 mil.
Occupied Sq. Ft.
Vacant Sq. Ft.
OFFICE VACANCY, INVENTORY AND ABSORPTION | Q2 2013 | NORTH AMERICA
P. 2 | COLLIERS INTERNATIONAL
HIGHLIGHTS | Q2 2013 | OFFICE | NORTH AMERICA
KEY TAKEAWAYS (continued)
• The primary ICEE (intellectual capital, energy and education) markets remained strong through 1H 2013, posting 6.2 million SF of net absorption compared with 3.1 million SF of absorption in the primary FIRE (finance, insurance and real estate) markets. However, after slightly negative absorption in Q1 2013, the FIRE markets recovered significantly in Q2 2013—a key trend to monitor as the economic recovery broadens. FIRE markets absorbed 3.2 million SF in Q2 2013, compared with 4.1 million SF in ICEE markets.
• Construction activity remains very low by historical standards, and concentrated in markets with the strongest demand. In the U.S., 75 million SF were under construction as of June 2013, with 27% of this space in the medical office category. This measured supply response will remain a key supply-side driver of the office market recovery.
• Transaction volume increased by a robust 36% year-over-year in Q2 2013 to $21.0 billion. Investors are moving further out along the risk spectrum, and the share of cross-border investors is growing amid global economic weakness.
Macroeconomic TrendsThe U.S. economic recovery gained steam through 1H 2013, adding more than 1.2 million jobs. Average monthly job creation accelerated to 202,000, compared with average net monthly job creation of 183,000 in 2012, 175,000 in 2011 and 85,000 in 2010. The acceleration in the rate of job growth underscores the resilience of the recovery, occurring despite sequestration in the U.S. and economic slowdowns in many other countries. As of June 2013, the economy has recovered about 75% of jobs lost during the recession. As the effects of the sequester dissipate into next year, the economic recovery should gain steam, resulting in stronger GDP and employment growth. Total employment is on track to reach the recent peak of about 138.1 million jobs by mid-2014.
The recovery in office-using employment has been stronger than the overall employment recovery. As of mid-2013, the primary office-using employment sectors had recovered 90% of jobs lost during the recession. The professional and business services sector has been the main driver of office-using employment growth, and has accounted for about one-quarter of total jobs added during June. Fueled by the rapid expansion of the technology industry and robust hiring of temporary workers, this sector
-10%-8%-6%-4%-2%0%2%4%
Total Employment Financial activitiesProfessional and Business Services O�ce-Using Employment
MONTHS0 10 20 30 40 50 60 70
NOTE: Latest data as of June 2013. X-axis indicates number of months elapsed since each sector’s previous cyclical employment peak. Information services employment excluded because sector peaked in 2001
Sources: Bureau of Labor Statistics, Colliers International
CHANGE IN U.S. EMPLOYMENT FROM CYCLICAL PEAK
-270.0
-193.7
-96.0
-57.8 -28.2
-27.5
14.2
18.1
36.1 53.0
202.9
246.3
-300.0 -200.0 -100.0 0.0 100.0 200.0 300.0Calgary, AB
Montréal, QC
Vancouver, BC
Ottawa, ON
Regina, SK
Victoria, BC
Edmonton, AB
Halifax, NS
Waterloo Region, ON
Saskatoon, SK
Winnipeg, MB
Toronto, ON
SF (Thousands)
CBD OFFICE ABSORPTION BY MARKET | Q2 2013 | CANADA
CBD OFFICE UNDER CONSTRUCTION BY MARKET | Q2 2013 | CANADA
HIGHLIGHTS | Q2 2013 | OFFICE | NORTH AMERICA
COLLIERS INTERNATIONAL | P. 3
METROPOLITAN AREA JUNE 2013 (%)
JUNE 2012 (%)
CHANGE (BPS)
1 Riverside-San Bernardino 12.7 10.2 -250
2 Sacramento 10.7 8.5 -220
3 San Diego 9.3 7.3 -200
4 San Francisco-Oakland 8.5 6.5 -200
5 San Jose 8.9 6.9 -200
6 Seattle-Tacoma 7.9 5.9 -200
7 Orlando 8.8 6.9 -190
8 Tampa 9.1 7.2 -190
9 Jacksonville 8.7 7.0 -170
10 Las Vegas 11.8 10.1 -170
LARGEST YEAR-OVER-YEAR DECREASE IN UNEMPLOYMENT RATE | USA
NOTE: Data not seasonally adjusted; rankings are of metro areas with population of 1 mil. or moreSources: Bureau of Labor Statistics, Colliers International
0
10
20
30
40
50
60
70
80
2000 20
0120
0220
0320
0420
0520
0620
0720
0820
0920
10 2011
2012
2013
Source: National Associaton of Home Builders
NAHB/WELLS FARGO HOUSING MARKET INDEX (HMI) | JULY 2013
100
120
140
160
180
200
220
1990
1995
2000
2005
2010
NAR COMPOSITE HOUSING AFFORDABILITY INDEX | MAY 2013
Source: National Association of Realtors
has been one of the fastest-growing since the end of the recession, with the current employment level about 500,000 positions higher than the pre-recession peak. Even excluding temporary employment, job growth has been robust —a positive sign for office space demand. The financial activities sector has been much slower to recover, having regained only 31% of jobs lost during the recession as of mid-year. Nonetheless, the trend is positive, with year-over-year job growth of more than 1% for 16 consecutive months through June 2013. We expect this sector to continue to recover at a slow rate, driven by ongoing improvement in the housing market. Faster growth in this sector will be prevented by stricter regulation of financial institutions (such as the recent adoption of the Basel III capital rules by the Federal Reserve), as well as rising mortgage rates, which are already dampening refinancing activity.
Canada’s economic recovery is well ahead of the U.S.: According to a recent analysis by Economic Modeling Specialists Intl. (EMSI), all but one of Canada’s census metropolitan areas (CMAs) have regained all of the jobs lost from 2008–2009, and the largest eight CMAs have regained between 135% and 700% of jobs shed during that period. The Canadian economy slowed during the first half of the year, averaging a net increase of 14,000 jobs per month compared with a monthly average of 27,000 during the second half of 2012. However, the improving economic outlook in the U.S. is boosting confidence among Canadian firms. The Conference Board of Canada’s Index of Business Confidence, a quarterly survey of 1,500 Canadian firms, increased to 101.5 in the second quarter, its highest level in more than a year; about 37% of respondents anticipated that economic conditions will improve during the next six months.
BROADER RECOVERYAs noted in our Q1 2013 report, the U.S. economic recovery is broadening to include more markets and employment sectors, a trend reflected in this quarter’s office market data. The housing recovery has been a key element, as increased sales and construction have boosted payrolls in related sectors, and in some of the hardest-hit markets during the recession. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) exceeded 50 in June 2013 for the first time in more than seven years, and jumped to 57 in July, even amid rising mortgage rates. (An HMI reading above 50 indicates that more builders view operating conditions as good rather than poor.) Former housing bubble markets such as the Inland Empire, Sacramento, Las Vegas, San Diego and Tampa were among the major markets posting the largest year-over-year decreases in unemployment rate in June 2013. Although this decrease was partially attributable to workers dropping out of the labor force upon the expiration of their unemployment benefits, improving labor market conditions also contributed to this trend.
Despite recent increases in new home sales and construction, the housing market recovery still has significant room to run; single-family housing starts totaled a seasonally-adjusted annual rate (SAAR) of 591,000 in June 2013, only slightly more than half the average SAAR during the last 30 years. Housing completions (both single- and multifamily) totaled a
P. 4 | COLLIERS INTERNATIONAL
HIGHLIGHTS | Q2 2013 | OFFICE | NORTH AMERICA
METROPOLITAN AREAQ2 2013
VACANCY RATE(%)
Q1 2013 VACANCY RATE
(%)
CHANGE (BPS)
1 Fairfield, CA 24.20 25.54 -134
2 San Francisco Peninsula 12.91 14.10 -119
3 Albuquerque 20.22 21.17 -96
4 Columbia, SC 19.39 20.35 -95
5 Oakland 15.17 16.07 -90
6 Cincinnati 17.72 18.61 -89
7 Orlando 13.47 14.27 -81
8 Jacksonville 12.78 13.57 -79
9 Grand Rapids 23.38 24.13 -74
10 Orange County 15.19 15.92 -73
LARGEST QUARTERLY VACANCY RATE DECREASE | NORTH AMERICA
Sources: Colliers International
VACANCYThe trend was positive in Q2 2013, with the North American vacancy rate decreasing by 10 basis points to 13.86% from the previous quarter. The U.S. vacancy rate decreased by 14 basis points during the period but remained nearly double the Canadian vacancy rate, which increased by 33 basis points during the quarter to a still-low 7.24%. Among the markets tracked by Colliers, 56 registered quarterly decreases in vacancy rate, 30 registered increases, and one was unchanged. Of the markets with increases in vacancy rate, eight were in Canada, all of which still posted sub-9% vacancy rates as of Q2 2013.
SAAR of just 755,000 in July, well below IHS Global Insight’s projection of 1.4 million new housing units required annually to accommodate current growth in the number of primary households, demand from second-home buyers, and demolitions. Even with recent mortgage rate and price increases, affordability remains elevated relative to historical levels. Thus, the market should be able to withstand additional increases in financing costs, supporting further direct and indirect job creation and demand for office space. We will continue to monitor risk factors, such as the increasing use of adjustable-rate mortgages by buyers on the margin and price spikes in select markets, for signs of overheating, but currently we maintain a positive outlook on housing and its effect on office market demand.
Behind the Statistics & Beyond the BasicsScope of Colliers’ Office Outlook Report: Colliers tracks office space in 87 markets in the U.S. and Canada totaling nearly 6.4 billion square feet. The 75 U.S. markets account for the lion’s share of this space, with about 5.9 billion square feet of tracked inventory. Our coverage includes 22 markets with more than 100 million square feet of space, which combined account for 3.8 billion square feet, or about 60% of our office market inventory. The largest U.S. markets are New York, Washington, D.C., Chicago, Dallas and Atlanta; Toronto is the only Canadian market with more than 100 million square feet of space.
North American Downtown Markets:Excluding renewals, of the leases signed this quarter in your CBD/downtown, did most tenants...?
Hold Steady62.0%Expand
18.3%
Contract19.7%
North American Downtown Markets:What was the trend in Free Rent (in months) o�ered by CBD landlords this quarter?
Same 80.9%
Less8.8% More
10.3%
North American Downtown Markets:What was the trend for tenant improvement allowances o�ered by CBD landlords this quarter?
Same 79.4%
Less7.4%
More13.2%
North American Suburban Markets:Excluding renewals, of the leases signed this quarter, did most tenants...?
Hold Steady64.8%
Expand28.2%
Contract7.0%
HIGHLIGHTS | Q2 2013 | OFFICE | NORTH AMERICA
COLLIERS INTERNATIONAL | P. 5
MARKET SQUARE FEET
1 Boston 1,656,001
2 Boise 1,384,937
3 Chicago 1,110,774
4 San Jose/Silicon Valley 1,078,743
5 Orange County 1,034,700
6 San Francisco 1,011,487
7 Denver 987,871
8 Minneapolis 911,539
9 Atlanta 870,958
10 Kansas City 842,288
11 San Diego 817,506
12 St. Louis 816,212
HIGHEST ABSORPTION | 1H 2013 | NORTH AMERICA
Source: Colliers International
functions is also critical. Thus, markets such as Raleigh-Durham and Atlanta, which combine a high concentration of top-tier research universities and a relatively low cost of doing business, are well positioned to accommodate additional growth in office demand from manufacturing.
Although the overall trend in absorption is positive, tenant densification will continue to temper improvement in the office market during the economic recovery and expansion—and not just in the most expensive MSAs. In Kansas City for example, the GSA is relocating 800 employees into a 150,000 square-foot space downtown, about half the size of the space currently occupied by those employees in South Kansas City. In addition to federal government downsizing, technological advances are reducing the need for some support staff and equipment. New technologies also allow companies to monitor workstation usage during the day, helping them to become more efficient in their space usage. As employers’ support of mobile devices such as tablets and smartphones enables more employees to work remotely, these monitoring systems will assist companies in maximizing their desk utilization rates, resulting in a net decrease in required office space relative to historic levels.
ABSORPTIONAbsorption accelerated this quarter, bringing the YTD total to 19.4 million square feet. Among the markets tracked by Colliers, 63 posted positive absorption in 1H 2013, and just 24 posted negative absorption, including 6 of the 12 Canadian markets. ICEE markets continued to lead, including Boston, San Jose, Orange County, San Francisco and Denver. However, it is noteworthy that several markets that have been lagging during the re-covery were among the top markets for net absorption in 1H 2013, includ-ing Chicago, Orange County and Atlanta. Another notable trend we’re seeing is that technology and energy companies—unable to find employees with the desired skill sets in their typical industry hubs—are relocating to or expanding into other metropolitan areas. This should result in a broader recovery in office market conditions going forward.
A less obvious benefit of the onshoring of manufacturing activities is its positive impact on office demand. Today’s increasingly automated and efficient supply chain requires a skilled workforce to handle highly complex engineering, design and other production functions. Firms often prefer to locate these workers near production facilities in order to facilitate communication and improve efficiency. Thus, we expect growth in office demand near returning and expanding manufacturing facilities to accommodate their white-collar employees. Markets (such as Phoenix, Houston and Dallas) in low-cost, right-to-work states will likely be the primary beneficiaries of this trend going forward. Proximity to educational institutions that provide the skilled workforce to handle these complex
The housing market recovery was apparent in the vacancy rate statistics. Several markets with the largest decrease in vacancy rate saw particularly significant housing corrections during the recession and rebounding housing markets in recent quarters. Orlando, Jacksonville, Orange County, Miami, Fort Lauderdale, San Diego, the Inland Empire and Sacramento all posted quarter-over-quarter vacancy rate decreases of at least 35 basis points. These markets also have posted double-digit year-over-year price appreciation in recent quarters, spurring construction activity. Further increases in housing construction should drive growth in office market demand in these markets.
CONSTRUCTION ACTIVITYAccording to Dodge Pipeline data, U.S. office construction activity totaled 75 million square feet as of mid-year 2013, with 27% of this space composed of medical office properties. Construction remains highly concentrated in markets with the strongest economic growth and tenant demand in recent years, including Houston, Boston, Dallas-Fort Worth, San Francisco and San Jose. Texas alone accounts for nearly 20% of construction under way, followed by California at about 11%, more than half of which is in San Francisco and San Jose. Unsurprisingly, construction activity in the primary North American ICEE markets tracked by Colliers is more than double that of the primary FIRE markets: 28.7 million square feet and 14.5 million square feet, respectively. Looking at the 87 markets that Colliers covers, supply-side pressure remains low, with the amount of square footage under construction in Q2 2013 representing just 1.2% of existing inventory. Because of the relatively slow recovery in the U.S., space under construction represented less than 1% of existing stock, compared with 3.9% in Canada where the economic expansion is further along.
P. 6 | COLLIERS INTERNATIONAL
HIGHLIGHTS | Q2 2013 | OFFICE | NORTH AMERICA
Much of the space under way is build-to-suit in response to a lack of suitable space available in the market. Increasingly, new and renovated office space is being used as a recruiting tool as the competition for skilled workers in the technology and energy industries intensifies. For example, energy firms in Houston are seeking out newly constructed, LEED-certified buildings to attract talent from both within and outside the metropolitan area. The market for highly skilled energy industry workers will likely tighten further as horizontal drilling and fracking enable continued growth in natural resource production. Also, with fewer students pursuing energy-related degrees in the 1980s and 1990s following the oil bust, the energy industry faces an even greater challenge than most other industries in replacing its aging workforce, which will maintain tight labor market conditions going forward. These factors place even greater importance on the workspace as a recruitment tool. The technology industry faces a similar challenge in attracting employees to support further growth, illustrated by fierce competition for the engineers, designers and other skilled workers that were recently laid off by Zynga. The result of this trend will likely be a bifurcation in market conditions. As tenants in industries with tight labor markets favor newer buildings constructed to meet the specific demands of their talent, space in properties less suited to the demands of these workers will languish.
Although still low in most markets, speculative construction is picking up in markets with the strongest demand. Developers recently announced planned groundbreakings on the 22 Waugh and Two Hughes Landing projects in Houston. Also, Hines recently broke ground on 1601 Wewatta, a speculative Class A building in the LoDo area of Denver. With vacancy rates still elevated in many office markets, we expect speculative construction activity to continue to be focused on the strongest submarkets in select metropolitan areas. We also expect construction to commence on more projects that were put on hold during the recession as rising rents and demand for high-quality space support development activity. For example, Oliver McMillan recently announced that it will build 86,000 square feet of office space for growing apparel company Spanx at the former site of the Streets of Buckhead project, a large mixed-use development in Atlanta that stalled during the recession.
Rising construction costs also continue to restrain development activity. As noted in Colliers’ previous quarterly reports, costs increased throughout the recession, and this trend has continued during the current recovery. According to Engineering News-Record’s Construction Cost Index, construction costs were up 2.5% year-over-year in July 2013 and more than 20% from July 2007. Wages for both common and skilled labor as well as materials costs increased on a year-over-year basis, making upward cost pressures an ongoing concern for investors and developers.
Capital Markets & Transaction ActivityU.S. office transaction volume surged by 21% quarter-over-quarter and 36% year-over-year to $20.2 billion in Q2 2013, as fears regarding sequestration and other factors that constrained investment activity in Q1 2013 were alleviated. This total was the highest second-quarter transaction volume since 2007. The large amount of available capital supported several high-dollar transactions, including several $1 billion+ deals, mostly in Manhattan, after just one between the fall of 2008 and year-end 2012, according to Real Capital Analytics. Also, Texas is attracting a growing
PROPERTY TYPE SQUARE FOOTAGE (THOU.) TOTAL (%)
High Rise 4,764 6.3
Mid Rise 20,634 27.5
Low Rise 29,405 39.2
Medical Office 20,231 27.0
TOTAL 75,034
OFFICE SPACE UNDER CONSTRUCTION BY TYPE | USA
Sources: Dodge Pipeline, Colliers International
U.S. O�ce Space Under Constructionby census division
7.5%West North Central
5,609 SF (Mil.)14.6%Mid Atlantic10,978 SF (Mil.)
6.2%New England4,625 SF (Mil.)
20.7%South Atlantic
15,532 SF (Mil.)
3.5%East South Central
2,485 SF (Mil.)22.0%West South Central
16,501 SF (Mil.)
5.2%Mountain
3,870 SF (Mil.)
12.7%Paci�c9,558 SF (Mil.)
7.8%East North Central5,876 SF (Mil.)
7.8%East North Central5,876 SF (Mil.)
20 15 10 5
SF (mil.)SF (mil.)SF (mil.)SF (mil.)
OFFICE SPACE UNDER CONSTRUCTION BY U.S. CENSUS DIVISION
Sources: Dodge Pipeline, Colliers International
-100%
-50%
0%
50%
100%
150%
200%
020,00040,00060,00080,000
100,000120,000140,000160,000180,000
2008 2009 2010 2011 2012 2013
U.S. (left axis) Canada (left axis) Year-Over-Year Change (right axis)
OFFICE TRANSACTION VOLUME | Q2 2013 | NORTH AMERICA
Source: Real Capital Analytics
HIGHLIGHTS | Q2 2013 | OFFICE | NORTH AMERICA
COLLIERS INTERNATIONAL | P. 7
PEAK-T0-TROUGH LOSS RECOVERED | MAY 2013
INDEX
CBD Office – Major 89.8%
CBD Office – All 77.5%
Total Office 49.6%
Suburban Office – Major 43.9%
CBD Office – Non-Major 38.8%
Suburban Office – All 22.1%
Suburban Office – Non-Major 4.2%
Source: Moody’s/RCA CPPI
6.4% 6.4%
7.1% 7.3%
7.5% 7.5% 7.7%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
CBD
Major M
etros
Total
O�ce
Single
Tena
nt
Subu
rban
Medica
l O�ce
Non-M
ajor M
etros
OFFICE CAP RATES BY LOCATION AND PROPERTY TYPE | Q2 2013
Source: Real Capital Analytics
amount of investor interest due to its robust economic growth, as indicated by Cousins Properties’ recent acquisition of a 10-building office complex in Houston and an office tower in Fort Worth for a total of more than $1 billion. Investors are moving further out on the risk spectrum in terms of property location and asset type in search of higher yields, a trend that we expect to continue as the economic recovery broadens to include more markets and industries. Greater risk tolerance and sustained economic growth should fuel increased transaction activity during 2H 2013.
The office CMBS delinquency rate continues to trend downward amid improving market fundamentals and an increase in resolutions. According to Trepp, the percentage of office CMBS that were 30 or more days delinquent decreased to 9.97% in June, down almost 50 basis points from one year earlier. However, we believe that significant risk lies in 10-year CMBS issued between 2005 and 2007 at peak pricing. Although overall CMBS delinquency rates have been trending down, delinquency rates on CMBS from the 2005–2007 vintages remain much higher than for the preceding years as well as for more recent vintages. According to Wells Fargo, the overall CMBS 30+ day delinquency rate in May 2013 was 14.59% for the 2007 vintage, compared with 4.16% for the 2004 vintage and 0.01% for the 2012 vintage. Approximately $400 billion in CMBS is set to mature between 2015 and 2017, and rising interest rates and limited or no NOI growth pose a major challenge to borrowers seeking to refinance loans issued in 2005–2007, most of which were interest-only.
Signs of a likely reduction in the Fed’s bond-buying programs later this year led to an interest-rate spike in May and June, fostering considerable fears regarding future commercial real estate values. However, we believe that the reduction in bond purchases is positive, as it signals that the economy is healthy enough to grow without artificial stimulus from the Fed. Even with the recent interest rate spike, the spread between average office cap rates and the 10-year Treasury is still historically wide, at 400–500 basis points, meaning that there is a cushion to absorb higher interest rates. Office investment still offers an attractive risk-adjusted return and continues to draw investors from the multifamily sector as well as other asset classes. Also, we expect continued economic improvement and recovery in office market fundamentals to support higher NOI, helping to offset the increase in interest rates.
New York, NY – Midtown South Manhattan 847.00 4.7 - -
Oakland, CA 164.91 7.5 - 8.5
Orange County, CA - - 350.00 6.3
Orlando, FL 210.00 8.3 131.00 8.5
Philadelphia, PA 165.00 7.0 175.00 8.0
Phoenix, AZ 46.00 8.0 91.00 7.8
Pittsburgh, PA 110.00 8.5 100.00 8.5
Pleasanton/Tri-Valley, CA - - 151.85 9.9
Portland, OR - - 276.07 -Sacramento, CA 139.12 - 90.02 -
HIGHLIGHTS | Q2 2013 | OFFICE | NORTH AMERICA
COLLIERS INTERNATIONAL | P. 19
COLLIERS INTERNATIONAL601 Union Street, Suite 4800Seattle, WA 98101TEL +1 206 695 4200
FOR MORE INFORMATION
Andrea B. CrossOffice Research Manager | USA TEL +1 415 288 7892 EMAIL [email protected]
James CookDirector of Research | USATEL +1 602 633 4061EMAIL [email protected]
CONTRIBUTORS
KC Conway Chief Economist | USA
Jeff Simonson Senior Research Analyst | USA
Jennifer Macatiag Graphic Designer | USA
Cliff Plank National Director | GIS & Mapping
482 offices in 62 countries on 6 continentsUnited States: 140Canada: 42Latin America: 20Asia Pacific: 195EMEA: 85
• $2 billion in annual revenue
• 13,500 professionals and staff
• 1.12* billion square feet under management
• $71 billion USD in total transaction value*Together, Colliers International and FirstService manage 2.51 billion square feet of property— second-largest in the world.
The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.
Accelerating success.
UNITED STATES | OFFICE INVESTMENT
MARKETCBD SALES
PRICE (USD PSF)
CBD CAP RATE
(%)
SUBURBAN SALES PRICE
(USD PSF)
SUBURBAN CAP RATE
(%)
San Diego, CA 273.03 8.0 228.55 6.9
San Francisco Peninsula - - 250.00 6.8
San Francisco, CA 470.00 4.5 - -
San Jose – Silicon Valley 270.00 7.0 375.00 6.9
Savannah, GA 150.00 9.5 120.00 9.8
Seattle/Puget Sound, WA 337.00 6.0 171.22 7.1
St. Louis, MO 90.00 9.5 130.00 8.5
Stamford, CT 186.00 8.0 - -
Tampa Bay, FL 118.07 8.0 150.12 8.5
Walnut Creek, CA 220.00 7.3 180.00 8.0
Washington, DC 623.00 4.5 246.60 6.6
West Palm Beach/Palm Beach County, FL - - 162.00 8.0
Westchester County, NY - - 73.00 8.0White Plains, NY 93.00 8.0 - -
Inventory — Includes all existing multi- or single- tenant leased and owner-occupied office properties greater than or equal to 10,000 square feet (net rentable area). In some larger markets this minimum size threshold may vary up to 50,000 square feet. Does not include medical or government buildings.
Vacancy Rate — Percentage of total inventory physically vacant as of the survey date, including direct vacant and sublease space.
Absorption — Net change in physically occupied space over a given period of time.
New Supply — Includes completed speculative and build-to-suit construction. New supply quoted on a net basis after any demolitions or conversions.
Annual Quoted Rent — Includes all costs associated with occupying a full floor in the mid-rise portion of a Class A building, inclusive of taxes, insurance, maintenance, janitorial and utilities (electricity surcharges added where applicable). All office rents in this report are quoted on an annual, gross per square foot basis. Rent calculations do not include sublease space.
Cap Rate — (Or going-in cap rate) Capitalization rates in this survey are based on multi-tenant institutional grade buildings fully leased at market rents. Cap rates are calculated by dividing net operating income (NOI) by purchase price. NOTE: SF = square feet MSF = million square feet PSF = per square foot CBD = central business district
