Browse Tag: economic recovery

When High Vacancy Rates Persist Even As The Economy Recovers

Jim Garringer, CCIM, SIOR

Speaking in national terms, employment growth is tepid, and the pace of economic recovery is not what anybody would consider ideal.  These trends apply unevenly across regions and markets, meaning that in some places, recovery is presenting a “new normal” of economic growth that nonetheless includes a commercial property hallmark of economic recession: high vacancy rates.

The disconnect between national trends and some local realities is easily found: national declines in vacancy for office, retail, industrial and apartments are loudly touted  but not as prominent are reports (taking southwestern Florida only as a handy example — apologies to any Gators) of office vacancy rates mired in the high-mid teens. 

Jim Garinger, CCIM, SIOR, and Managing Director of Colliers International SW Florida has thought through what these challenges mean to landlords and tenants. Jim sees employers reducing space outlay per employee — a observation no doubt supported by the explosion in telecommuting and shared-workspace employment expectations of the internet-enabled millennial generation that we’ve written about here plenty of times.  In Jim’s article “Commercial Connections: Companies Are Downsizing For Higher Quality, Lower Cost”, he spells out ways the vacancy realities can and should affect the negotiations over commercial occupancy.

Historically, office occupancy rates have a positive correlation with office sales and leasing activity, but in this economic recovery there’s a twist. After companies have been able to keep their heads above water and generate profits, they are either looking at smaller spaces that are a higher quality, or at smaller spaces to cut overhead costs.

Either situation has companies “increasingly packing more employees into less space, a trend that is helping cause U.S. vacancy rates to linger at high levels even as employers add jobs in the slowly expanding economy,” said the Wall Street Journal in a recent article.

These factors present a unique situation for tenants seeking space, with a significantly lower amount of Class A office space available in Southwest Florida compared to B and C. According to the CoStar Southwest Florida Office Market Report for 2011, of the existing vacant space, 16 percent is Class A, 64 percent is B and 20 percent is C. The national vacancy average reflects the same trend, with 35 percent being Class A space, 49 percent Class B and 16 percent Class C.


[Landlords should] avoid losing a potential tenant by making an offer to build out dead space if you need to. With companies downsizing not only in amount of employees, but the amount of space each employee gets, consider being flexible with the space. For example, consider building out a space to create two spaces rather than keeping one large area that would only appeal to a large company.

[Tenants should] think creatively and don’t be scared off by unusual spaces that have potential to be used for a different purpose. These landlords are often struggling with finding a tenant or a solution to their space, and will offer an attractive rate for someone willing to reconfigure the space for their needs. For example, Fort Myers Preparatory and Fitness Academy recently leased a former Robb & Stucky warehouse, and while the 65,000-square-foot building required a renovation to create 33 classrooms and a cafeteria, the Landlord was able to recycle and sell a significant amount of shelving which offset some costs.

Check out Jim’s full post here.

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Grubb Goes Olympic, Hands Out Job Recovery Medals

Okay, not actual physical medals.  But commercial real estate titan Grubb & Ellis had a neat idea the other week.  As part of their “Good News Friday” series, they decided to take a look at the Bureau of Labor Statistics data on job recovery and then award gold, silver and bronze medals to the top three metro areas in each of the nine census divisions.  The results are heartening and a little surprising.  On top and awarded with the gold,  you’ll find Omaha, Pittsburgh, Austin and Boston with some eye-popping numbers — Austin especially.  Cue the Olympic theme music!

Chart of Grubb & Ellis's Job Recovery Olympics

For commercial real estate, job growth is one of the most important indicators to consider in the decision on where to buy or invest.  G&E research says the west and south will continue to grow at a faster pace than the northeast and midwest, “but strong contenders for investment capital can be found in all regions of the country.”

Need more info?  Contact G&E’s National Director for Market Analytics Robert Bach. 

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NAR Outlook: Commercial Real Estate Recovery Slows

Geographic center of the contiguous United Sta...

While underlying fundamentals remain positive and continue to support all commercial real estate sectors, ongoing tight loan availability and a slowdown in job creation has softened growth in some areas, says the NAR quarterly commercial real estate forecast.

Exports and jobs

NAR Chief Economist Lawrence Yun finds mixed results among the commercial sectors.  “Job creation in the second quarter was about half of what we saw in the first quarter, which is moderating demand in the office sector,” he said.  “Industrial and warehouse space is holding on better because imports and exports have advanced.  While exports to Europe generally are down, trade has been robust with India, China and other Asian nations, along with Brazil, Mexico and our strongest trading partner – Canada.”

Although still positive, dampened demand is slightly moderating rent growth with the exception of the multifamily market.  “Sharply higher demand for apartments is causing rents to rise at faster rates,” Yun said.  “A return to normal household formation will mean even lower vacancy rates and higher rents in the future.”

Credit crunch continues

The current commercial real estate cycle has been driven by shifts in demand without an oversupply of new construction.  “The difficulty small businesses have in getting commercial real estate loans for leasing or purchase is keeping a lid on demand,” Yun explained.  “Multifamily is the only commercial sector with a notable growth in new space, with some lending provided through government loans.”

With the exception of multifamily, vacancy rates remain above historic averages seen since 1999.  Over that timeframe the typical vacancy rate has been 14.4 percent for the office market, 10.1 percent in industrial, 8.1 percent for retail and 5.8 percent in multifamily.

Vacancy rates are marginally declining and rents are modestly rising in all of the sectors, but significant changes in the outlook are unlikely before the end of the year.  Many corporate decisions on spending and job hiring are on hold given uncertainty over the upcoming elections, whether Congress will effectively avoid a “fiscal cliff,” and unsettled issues such as health care and banking/financial regulations.

“Overall companies hold plentiful cash reserves, but they are hesitant to hire without clarity over how these outstanding issues will impact the bottom line,” Yun said.

“Commercial real estate gains could be thwarted if lending from small and community banks dry up from excessive regulatory compliance costs, and if international big-bank capital rules are applied to smaller lending institutions,” Yun added.

The sectors

NAR’s latest Commercial Real Estate Outlook1 offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets.  Historic data for metro areas were provided by REIS, Inc. a source of commercial real estate performance information.


  • Vacancy rates in the office sector are expected to fall from an estimated 16.1 percent in the third quarter to 15.6 percent in the third quarter of 2013.
  • The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.4 percent; New York City, at 10.0 percent; and New Orleans, 12.8 percent.
  • Office rent is projected to increase 2.0 percent this year and 2.6 percent in 2013.  Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, should be 24.1 million square feet in 2012 and 47.8 million next year.
  • Industrial vacancy rates are forecast to decline from 10.7 percent in the third quarter of this year to 10.5 percent in the third quarter of 2013.
  • The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 4.6 percent; Los Angeles, 4.8 percent; and Miami at 6.8 percent.
  • Annual industrial rent is likely to rise 1.7 percent in 2012 and 2.4 percent next year.  Net absorption of industrial space nationally is seen at 59.8 million square feet this year and 67.2 million in 2013.
Retail Markets
  • Retail vacancy rates are projected to decline from 10.9 percent in the third quarter to 10.7 percent in the third quarter of 2013.
  • Presently, markets with the lowest retail vacancy rates include San Francisco, 3.8 percent; Fairfield County, Conn., 3.9 percent; and Long Island, N.Y., and Orange County, Calif., both at 5.3 percent.
  • Average retail rent is forecast to rise 0.8 percent this year and 1.3 percent in 2013.  Net absorption of retail space should be 10.3 million square feet this year and 20.1 million in 2013.
  • The apartment rental market – multifamily housing – is expected to see vacancy rates drop from 4.3 percent in the third quarter to 4.2 percent in the third quarter of 2013; vacancy rates below 5 percent generally are considered a landlord’s market with demand justifying higher rents.
  • Areas with the lowest multifamily vacancy rates currently are Portland, Ore., at 2.0 percent; New York City and Minneapolis, both at 2.2 percent; and New Haven, Conn., and San Jose, Calif., both at 2.4 percent.
  • Average apartment rent is likely to increase 4.1 percent in 2012 and another 4.4 percent next year.  Multifamily net absorption should be 219,300 units this year and 236,600 in 2013.


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Recovery Not Limited To Biggest Commercial Markets, Says CCRSI

Picture of a small town mall

The June 2012 CoStar Commercial Repeat Sale Indices are a look at a limited number of repeat commercial repeat sales.  The numbers look at a set of repeat sales in April 2012 in two main ways: value-weighted, meaning relevant to premium properties and markets in order to see broader trends in capital flow in commercial markets, and equal-weighted, which focuses on more average-priced commercial properties.

It’s the equal-weighting that suggests that the broader economic recovery is lifting prospects for not just the big city office towers, but now also for the smaller malls and office complexes making up the secondary and tertiary markets.  Having lagged behind the recovery in primary markets, the suggestion is that smaller communities are feeling some long-delayed relief in their commercial property markets.

APRIL PRICES MIXED: The two broadest measures of aggregate pricing for commercial properties within the CCRSI–the equal-weighted U.S. Composite Index and the value-weighted U.S. Composite Index–posted a 1% gain and a 2.2% retreat, respectively, in April, although both advanced over year-ago levels. The equal-weighted index weighs each repeat-sale equally and is therefore heavily influenced by the more numerous smaller transactions, and the value-weighted index weighs each repeat-sale by transaction size or value and is therefore heavily influenced by larger transactions.

Other items in the CCRSI:

Value-weighted gains slightly down: Indicators for the primary market fell somewhat, suggesting a bit of  a leveling off of prices  in the primary commercial real estate markets.

Distress levels on the decline: Only 24.3% of observed property trades in the study were distressed, which is down over 12% from the peak level of March 2011.

European Investors On The Rise: The study found the share of US commercial property purchases by European investors has more than tripled from 2011 levels.

Check out a summary of the CCRSI here.

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New NAR Commercial Numbers: Transactions, Income Up In 2011 For REALTORS®

Pictures of raised thumbs

It’s official.  2011 was better for NAR Commercial member practitioners.

REALTORS® who spend some or all of their activity in leasing, commercial sales, brokerage, industrial space, land development, office space, multifamily, retail and property management answered the NAR’s 2011 Commercial Member Profile survey, reporting a rise in their median gross income as well as an increase in transactions.

Five Becomes Seven

How many transactions and in what kind of patterns?  The survey says REALTORS®  a median of seven transactions in 2011, up from 2009 and 2010 when the typical agent had five transactions.  The survey further found a large majority of commercial members work at least 40 hours a week. More than half reported they spend 75 – 100 percent of their time on commercial real estate activity. Sixty-four percent derived 50 percent or more of their income from commercial real estate activity in 2011.

Details About Deals

According to the survey, 2011’s median sales transaction volume (including those members without transactions) was $1,058,300. When those members who had no transactions were excluded, the median transaction volume was $2,010,500. Brokers typically had higher sales transaction volumes than agents, and 22 percent of commercial members had no transactions with sales volume. The median dollar value of sales transactions was $414,300 and the median square footage was 9,600. In both instances, brokers typically had higher median dollar value of sales transactions, as well as sold larger spaces when compared to sales agents.

A Long, Hard Road

“The commercial real estate market still has a long way to go before full recovery, yet Realtors® are reporting positive trends that give us hope that the market is on its way to becoming healthy again,” said NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami. “Realtors® who practice commercial real estate help build communities by facilitating investment and promoting the sale and lease of commercial space, which supports millions of jobs nationwide. They are hopeful that the market will strengthen and their business will help spur the nation’s economic recovery.”