Market Trends

Briefly Noted

• Hospitality — Respondents to Ernst & Young’s Hospitality Investment Survey chose Washington, D.C., Manhattan, Los Angeles, Chicago, and San Francisco as the top five hotel investment markets, despite the fact that Washington and Chicago are not among the top five revenue-producing markets.

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• Industrial — Although availability rates nationwide have remained flat due to slowing demand, average rents and sales prices are increasing modestly in high-tech markets such as Austin, Texas, Boston, and Seattle, according to CB Richard Ellis.

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• Multifamily — Plenty of affordable, available Fannie Mae and Freddie Mac capital is driving deals among real estate investment trusts, providing an 11.48 percent 1Q08 total return for apartment REITs, according to the National Association of Real Estate Investment Trusts.

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• Office — While the 1Q08 national vacancy rate rose to 12.9 percent, the sublease vacancy rate remained unchanged, and at 1.3 percent, is at its lowest level since the last recession, according to Torto Wheaton Research.

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• Retail — At 7.7 percent, the 1Q08 strip-mall vacancy rate is the highest in 12 years, according to Reis. Retail space absorption declined by 1.36 million sf from 4Q07.

Architects Report Fewer Jobs

In February the Architecture Billings Index fell to its lowest point in six years, indicating that conditions for new construction remain grim. A monthly survey of architectural firm business tracked by the American Institute of Architects, the ABI showed a dramatic slowdown at firms that specialize in commercial/industrial projects. In anecdotal comments that accompanied the report, many architectural firms reported strong public-sector projects going forward, but very few private-sector ones. “The problems in the financial sector are impacting clients’ ability to get construction loans and proceed with projects,” said the head of a 10-person firm in the South.

Construction Consensus Forecast

An average of six major construction forecasts

Source: American Institute of Architects

Worth Quoting

"The office real estate market now finds itself engaged in a battle of expectations. Tenants see a faltering economy and as a result expect lower rents, while landlords feel confident with occupancy rates still near historic highs, giving them the leverage to push rents higher."

—Ross Moore, senior vice president and director of market and economic research, Colliers International

Play Fair to Increase Profits

“In the long run, fairness is the lubricant for the sales machinery,” says John Zhang, a Wharton School of Business marketing professor who, along with two other researchers, found that business people maximize profits when they consider fairness as part of the sales equation. People concerned about being fair are more likely to coordinate their efforts so everyone shares in the profit, their research shows. However, fairness goes hand in hand with increased market transparency, and both work together to simplify pricing and business negotiations. “With transparency, you know what’s fair and what’s not,” Zhang says. “Without it, you have to rely on reputation and trust, which can take a long time to develop.”

Smart Reads

If U.S. private business fails, America fails, warns Rob Slee, author of Midas Managers. Although private companies generate more than 50 percent of the U.S. gross domestic product and 80 percent of new jobs, nearly 75 percent of privately owned companies are not increasing their value. Slee presents stories of midsize businesses reinventing themselves to compete in a global economy and provides strategy blueprints for others to follow. In today’s “Conceptual Age,” multidimensional thinking and imagination are the keys to wealth creation.

In Who’s Your City? Richard Florida, author of The Creative Class, exhorts people to think about where they live relative to their age, activities, and preferences, instead of just going where the job is. Businesses also must consider those same attributes to be where the talent is, Florida reasons. He chooses Pacific coastal markets as future mega-regions: “The San Francisco region is buoyed by earned wealth … . In the Bay Area and Silicon Valley, wages constitute about 80 percent of wealth. Compare that to southern Florida, where only about 20 percent of the wealth is derived from wages. The economy is mostly transferred wealth, whether it’s snowbirds buying condos or capital flight from Latin America. NorCal’s wealth is real wealth.”

Industrial Vacancies

Markets with biggest percentage change in year-over-year vacancies

Source: Colliers International

London’s Heathrow Aiport is surrounded by the world’s most expensive industrial market where the total occupancy cost is £211.23 or $334.75 per square meter per year, according to Cushman & Wakefield.

Industry Diversity Explored

The 2008 Global Diversity Summit, July 21–23, in Atlanta will focus on increasing diversity in the industry. “Reinvesting Real Estate — Faces and Places” will bring together senior-level minority commercial real estate professionals for education and networking opportunities. For more information on the program go to www.globaldiversity summit.org.

The Color of Money

For all the green talk that’s permeated the commercial real estate industry in the past few years, seeing green — as in money — is what property owners and investors react to. A CoStar study shows that green buildings — those certified as Leadership in Environmental and Energy Design and Energy Star properties — command higher rents, occupancies, and sales prices than comparable buildings. On average LEED-certified buildings attain rents that are $11.33 psf higher and have a 4.1 percent higher occupancy rate. Certified buildings also sell for $171 psf more than non-green buildings. Properties that have earned the Environmental Protection Agency’s Energy Star rating — a prerequisite to LEED certification — have a $2.40 psf rental rate premium and a 3.6 percent increase in occupancy. Energy Star buildings sell for an average of $61 psf over standard buildings. CoStar analyzed 1,300 LEED and Energy Star properties representing 351 million sf in its property database.

Top 10 Green Metros

Source: CoStar

Blowing in the Wind

Source: American Wind Energy Association

Retail Expansion 2008

Source: Marcus & Millichap

National Investment Sales

January/February 2008

Los Angeles became the first city to mandate that all projects larger than 50,000 sf or 50 units must meet LEED-certified standards. The law signing took place in April at the Luma, a 19-story residential project that is LEED-certified gold.

"Free minibars are only a matter of time, predicts [Victoria] Mather, [Vanity Fair travel editor]. ‘If a hotel costs a lot, it shouldn’t nickel and dime over small things. … High-end travellers are not going to get wasted.’"

— “Is This the Future of Hotels?” TimesOnline

Online Market Trends is written by Sara Drummond, managing editor of Commercial Investment Real Estate.