HIGHLIGHTS NORTH AMERICA WWW.COLLIERS.COM Q3 2010 | OFFICE ROSS J. MOORE Chief Economist | USA Without raising expectations to unrealistic levels, this quarter’s results suggest the office market has indeed hit bottom and has begun what will almost certainly be a very long and slow road to recovery. Although the economy continues to languish and job growth remains disappointing, third quarter occupancies improved for the second three month period and the national vacancy rate posted a slight decline. Canadian markets also registered modest growth, helping to round a good quarter for North American office markets. With both the U.S. and Canadian economies posting reasonable growth and the addition of more private sector jobs, leasing markets are expected to continue improving, albeit only in small increments with no sudden surge anticipated. Third quarter data reaffirms our view that the U.S. office market has entered the first phase of what will likely be a multi-stage recovery. Most encouraging is the nine-month-long gain in private sector employment. Furthermore, office-using employment was reasonably strong during the July-September period, suggesting office leasing activity is unlikely to fade. The uncertainty surrounding the midterm elections and the possible extension of the Bush administration tax cuts may dampen office leasing demand for the fourth quarter, but that should only be a temporary phenomenon. Widespread increases in rents are unlikely anytime soon, but occupiers in select markets would be wise to lock in today’s lease rates before lower availabilities give land- lords the upper hand. U.S. office vacancy rate down marginally. The U.S. national office vacancy rate moved slightly lower during the third quarter, moving two basis points lower (100 basis points equals one percent). This represented the Two quarters of positive absorption shows the U.S. office market is now stabilizing after a two year period of persistent weakness. MARKET INDICATORS Relative to prior period U.S. OFFICE MARKET SUMMARY STATISTICS, Q3 2010 Office Markets Show First Signs of Beginning a Long Slow Road to Recovery Q3 2010 Q4 2010* VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE *Projected U.S. OFFICE MARKET Q3 2009 – Q3 2010 Million Square Feet Vacancy (%) -20 -10 0 10 20 Q3 2010 Q2 2010 Q1 2010 Q4 2009 Q3 2009 Absorption Completions Vacancy 13 14 15 16 17% Vacancy Rate: 16.28% Change from Q2 2010: –0.02 Absorption: 6.6 Million Square Feet New Construction: 5.4 Million Square Feet Under Construction: 20.6 Million Square Feet Asking Rents Per Square Foot (Change from Q2 2010): Downtown Class A: $39.06 (1.4%) Suburban Class A: $26.22 (–0.1%) continued on page 7
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HIGHLIGHTSNORTH AMERICA
www.COllIERs.COM
Q3 2010 | Office
ROss J. MOORE Chief Economist | USA
Without raising expectations to unrealistic levels, this quarter’s results suggest the office market has indeed hit bottom and has begun what will almost certainly be a very long and slow road to recovery. Although the economy continues to languish and job growth remains disappointing, third quarter occupancies improved for the second three month period and the national vacancy rate posted a slight decline. Canadian markets also registered modest growth, helping to round a good quarter for North American office markets. With both the U.S. and Canadian economies posting reasonable growth and the addition of more private sector jobs, leasing markets are expected to continue improving, albeit only in small increments with no sudden surge anticipated.
Third quarter data reaffirms our view that the U.S. office market has entered the first phase of what will likely be a multi-stage recovery. Most encouraging is the nine-month-long gain in private sector employment. Furthermore, office-using employment was reasonably strong during the July-September period, suggesting office leasing activity is unlikely to fade. The uncertainty surrounding the midterm elections and the possible extension of the Bush administration tax cuts may dampen office leasing demand for the fourth quarter, but that should only be a temporary phenomenon. Widespread increases in rents are unlikely anytime soon, but occupiers in select markets would be wise to lock in today’s lease rates before lower availabilities give land-lords the upper hand.
U.s. office vacancy rate down marginally. The U.S. national office vacancy rate moved slightly lower during the third quarter, moving two basis points lower (100 basis points equals one percent). This represented the
Two quarters of positive absorption shows the U.S. office market is now stabilizing after a two year period of persistent weakness.
MARkET INdICATORsRelative to prior period
U.s. OffICE MARkETsUMMARy sTATIsTICs, Q3 2010
Office Markets Show First Signs of Beginning a Long Slow Road to Recovery
Q3 2010
Q4 2010*
VACANCy
NET ABsORPTION
CONsTRUCTION
RENTAl RATE
*Projected
U.s. OffICE MARkET Q3 2009 – Q3 2010
Mill
ion
Squa
reFe
et
Vaca
ncy
(%)
-20
-10
0
10
20
Q3 2010Q2 2010Q1 2010Q4 2009Q3 2009
Absorption Completions Vacancy
13
14
15
16
17%
Vacancy Rate: 16.28% Change from Q2 2010: –0.02
Absorption: 6.6 Million Square Feet
New Construction: 5.4 Million Square Feet
Under Construction: 20.6 Million Square Feet
Asking Rents Per Square Foot (Change from Q2 2010): Downtown Class A: $39.06 (1.4%) Suburban Class A: $26.22 (–0.1%)
first drop (albeit very small) in vacancy after eleven consecu-tive quarterly increases. Office vacancies finished the quarter at 16.28 percent and possibly marked the beginning of a long gradual decline in vacancy. During the third quarter the Downtown vacancy rate decreased 8 basis points to register 14.86 percent while suburban vacancies held steady at 16.91 percent. One change of note was during the quarter down-town Class A vacancies moved significantly lower, dropping 32 basis points to register 15.87 percent. Canadian office va-cancy rates were mixed with central business district (CBD) vacancies rising 4 basis points to 7.16 percent while suburban vacancies decreased 8 basis points to 9.02 percent.
Office occupancies up for the second consecutive quarter. Possibly heralding the beginning of the next up cycle, U.S. of-fice markets collectively posted another quarter of positive absorption. This second quarter of positive absorption came after nine consecutive quarters of negative absorption begin-ning first quarter 2008. Third quarter absorption came in at 6.6 MSF (million square feet) which was a substantial in-crease from the second quarter when occupied space in-creased by 1.8 MSF. Third quarter absorption was also a sig-nificant improvement from the year ago period when 17.7 MSF was returned to the market. Examining third quarter absorp-tion in detail shows 92% of newly occupied space was in Class A buildings reflecting a move by tenants to upgrade their premises often with little additional cost. Canadian markets also recorded an increase in occupied space during the third quarter with absorption totaling 2.7 MSF.
Rent picture increasingly mixed. Third quarter rent data shows CBD rents increased a further 1.4 percent to average $39.06 per square foot while suburban rents largely held steady dropping by just two cents a square foot to $26.22. Looking beyond the headline numbers, however, shows most office markets are still characterized by declining rents. The reason for this apparent contradiction is rental averages are inventory-weighted and so a few large markets can skew the national averages. Without this “weighting” effect, third quar-ter CBD rents fell 0.4 percent and suburban rents dropped by 1.6%. Canadian downtown office rents moved lower during the quarter with CBD quoted rents decreasing 2.7% while suburban rents increased 1.2%.
Office construction pipeline continues to empty out. Third quarter office completions totaled just 5.4 MSF, a significant drop from the second quarter when construction totaled 11.1 MSF, and the lowest on record. Going forward office develop-ment will remain extremely subdued with construction activity falling to just 20.6 MSF at quarter end, compared with 29.2 MSF at the end of the second quarter and well below the 120 MSF underway at midyear 2008. Construction is expected to drift lower and with the exception of just a small number of build-to-suits and a few select speculative developments, of-fice development will be absent from the U.S. office landscape by as soon as mid-2011.
Office Markets Show First Signs of Beginning a Long Slow Road to Recovery
Continued from page 1
UNITEd sTATEs | OffICE INVEsTMENT
MARkET
CBd sAlEs PRICE
(Usd Psf)
CBd CAP RATE
(%)
sUBURBAN sAlEs PRICE
(Usd Psf)
sUBURBAN CAP RATE
(%)
Atlanta, GA 80.00 8.73 100.00 9.40 Bakersfield, CA 128.00 9.26 111.00 –Charleston, SC 250.00 8.00 135.00 11.00 Chicago, IL 220.00 7.25 120.00 8.00 Columbus, OH – – 118.00 –Dallas/Fort Worth, TX – – 75.00 8.75 Denver, CO 195.00 8.00 153.00 8.50 Fairfield County, CT – – 250.00 8.00 Fresno, CA 160.00 9.00 170.00 8.50 Ft. Lauderdale/Broward County, FL 183.05 6.65 80.00 –Hartford, CT 11.00 – 136.00 8.60 Honolulu, HI 251.00 7.00 – –Houston, TX 150.00 8.80 122.00 8.80 Jacksonville, FL 110.00 9.25 120.00 8.75 Las Vegas, NV – – 49.00 –Little Rock, AR 88.00 9 110.00 9.00 Los Angeles – Inland Empire, CA – – 71.00 –Los Angeles, CA 332.00 6.00 275.00 8.00 Miami-Dade Country, FL – – 319.00 –New York, NY – Downtown Manhattan 350.00 6.00 – – New York, NY – Midtown Manhattan 422.00 5.00 – – New York, NY – Midtown S. Manhattan 400.00 6.00 – – Oakland, CA – 8.00 – 9.00 Orange County, CA – – 162.00 8.10 Orlando, FL 183.59 – 171.28 9.20 Philadelphia, PA 122.00 9.00 112.00 9.00 Phoenix, AZ – – 105.00 –Pleasanton/Walnut Creek, CA 112.50 8.00 87.50 8.50 Portland, OR 162.58 – 159.56 7.16 Sacramento, CA 220.00 8.50 150.00 8.70 San Diego County, CA 124.50 – 181.66 8.45 San Francisco Peninsula, CA – – 250.00 6.50 San Francisco, CA 314.00 6.25 – – Stamford, CT 350.00 8.00 – –Stockton/San Joaquin County, CA 134.00 8.80 – – Tampa, FL – – 108.32 10.50 Washington, DC 724.22 5.80 – –West Palm Beach/Palm Beach Co., FL 97.44 10.50 105.39 11.00 Westchester County, NY – – 250.00 8.00
CANAdA | OffICE INVEsTMENT
MARkET
CBd sAlEs PRICE
(CAd Psf)
CBd CAP RATE
(%)
sUBURBAN sAlEs PRICE
(CAd Psf)
sUBURBAN CAP RATE
(%)
Calgary, AB 340.00 6.50 335.00 7.25 Kitchener-Waterloo, ON 160.00 8.00 110.00 7.75 Montreal, QC 275.00 7.00 190.00 7.75 Ottawa, ON 270.00 7.25 145.00 7.60 Regina, SK 213.00 7.45 – –Saskatoon, SK 175.00 7.75 - - Toronto, ON 167.00 – 151.00 9.30 Vancouver, BC 450.00 5.70 330.00 6.50
highlights | Q3 2010 | office | north AmericA
www.COllIERs.COM
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 at 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 FeetPsf = Per Square FootCBd = Central Business District
Glossary
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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.
