Spec Warehouse construction on the rise

In Chicago, strong absorption and occupancy and a shortage of top-tier industrial space is fueling a rapid increase in spec construction, said Scott Marshall, executive managing director for CBRE's Industrial Services, Americas, in presenting the company's 3Q 2013 U.S. Industrial Marketview. Of the 5.5 million square feet under construction in the market, almost half broke ground in the third quarter. 

Q3 Industrial Property Improving

Let's start with a 8.3% vacancy rate, which is a great number on a national basis and on the other side occupancy rates are up by 1.6% on a year over year basis. The industrial market is fast approaching the pre recession levels overall and in some factors has already surpassed it.  Even better is the fact that momentum is still positive with 70% of national markets showing increases, indicating a widespread improvement.  Chicago rents are up 3.2% over last year which is a good sign for owners and owners are not as generous on the lease give aways that they once were.  While improving, rates are one of the areas that have not yet reached their pre recession highs.

Buildings in the 100K SQ FT and below that were hit hard in the recession are showing a remarkable come back now and are the fastest growing segment of the industrial market.  Even the CoStar category of industrial building- old and small (40KSF and below) are finally showing improvement.

Gloom and Doomers predicted a collapse of the commercial real estate market. Why didn't it happen?

There is an interesting article in Fortune Magazine explaining why the commercial market didn't totally melt down to the extent the residential market did.  To quickly summarize:

1. While Commercial real estate was overbuilt it was not to the point the housing market was.  In fact until 2005 residential developments used areas that customarily would have been used for commercial development

2. Many owners of commercial properties still had income in the form of rent payments from tenants unlike home owners who lost their income when they lost their jobs. This allowed many to at least limp along and hold out until better times arrived.

3. Banks renegotiated loans and rolled balloon payments further down the road to allow the market to recover.  Of course there were foreclosures, but there were also third party sources with money to spend, and were able to scoop up income producing properties at bargain prices.

This is not to say that the commercial real estate market did not have its problems, values dropped on average of 40% and are still recovering.  There were foreclosures and a lot financial pain, but a complete meltdown as predicted NOPE.

Here is a link to the article:

http://finance.fortune.cnn.com/2013/09/23/commercial-real-estate-hilton/

News Release from CoStar indicates a pick up in nonresidential construction

A new report by Fitch Ratings predicts that the pace of new U.S. nonresidential construction will likely pick up headed into 2014, bolstering forecasts by CoStar Group economists during midyear economic reviews who expect modest rises in new supply for some commercial property segments.

Lombard Chamber Golf Outing

A little hot, but what a great day.  Another successful golf outing by the Lombard Chamber.

Retailers Joining in on the Recovery

Recent analysis by RBC Capital Markets shows  demand from retailers, as evidenced by planned store openings, continues to grow.  At the same time plans for new supply, either among regional malls or community centers, remains subdued with little uptick in planned deliveries.   National tenants, especially franchises, continue to scoop up vacancy among spaces of 5,000 square feet and smaller. At the same time, large box users are struggling to find sufficient space to satisfy planned store openings, RBC noted. It is  anticipated that vacancy rates and asking rents will continue to improve based on this information.

You thought you had the office market all figured out

There have been a lot of articles written about the smaller office of the future, perhaps getting as small as 100SF/person.  Gen Y and technology all playing a role and the recent trends in office leasing weighing in as well, all giving credence to the small office.  Then I read an article that said, wait a minute, this may be the result of where we are in the economic recovery.  Small businesses tend to downsize faster than mid and large size companies.  They also are the first to start adding jobs.  So small businesses are leasing space again, under 25,000SF, to suit their needs.  The big guys should weigh in later in the recovery and perhaps move that office size to the larger size.  Interesting to see what will happen here. You have to believe that with technology eliminating the square footage for housing servers and paper files that the office footprint will still be somewhat smaller.

Worry over Healthcare Capacity

A new study by Accenture shows that retail clinics in pharmacies, stores and other retail locations can significantly help service the influx of the newly insured under the Affordable Healthcare Reform Act.  It is estimated that these facilities can service 10.8 million patients annually within the next 3 years. Once regarded as competition to clinics these facilities now add additional capacity and refer patients needing further care to clinics.  In the past, it seems, that many of these patients would seek the services of a hospital emergency room for treatment of minor ailments.  With the growth of retail clinics, more patients can be seen there, and the emergency rooms can focus on real emergencies and more complex cases.  The connection to commercial real estate? Perhaps a larger footprint for pharmacies and other retail outlets and maybe even some absorption for some vacant big box stores.

Data vs. Retail

According to a CoStar article, Sears is diving into the data storage arena by converting some to the closed Sears and K Mart stores into data storage facilities.  Sounds like a pretty creative use for these facilities as more and more big box stores utilize the power of the internet to move product.  Not all of the closed stores can be converted to other big box stores, so why not think "out of the box" and figure out different uses for these buildings.  Good for Sears to look to the future and take advantage of the current digital trends.

Office Trends

I participated in the Webinar referred to in this article.  It provided good insight into the current trends the office market is taking.  Economics plays a role in decreasing the office footprint but the new office culture of open and flexible space to allow more collaborative efforts and the new technology also play a major role in decreasing the office footprint.  The entire article is reprinted below.

Changing Office Trends Hold Major Implications for Future Office Demand

Pioneered by Tech Firms in California, Communal Workspace Model Becoming More Mainstream Among Big Office Firms

Perhaps just as the inevitable disappearance of music, video and books stores should have been foreseen at the onset of a digitized connected world, so too should the commercial real estate industry start taking a hard look at changes occurring in the office market. 

Tenants are downsizing their offices, particularly larger public firms, as they increasingly adopt policies for sharing non-dedicated offices and implement technology to support their employees' ability to work anywhere and anytime, according to Norm G. Miller, PhD, a professor at the University of San Diego, Burnham-Moores, Center for Real Estate, in a webinar he presented to CoStar subscribers last week. 

Miller said he put together the webinar to examine what would happen if office tenants used 20% less of the nation’s current office space, which has a total valuation of $1.25 trillion. That decrease in demand would represent $250 billion in excess office capacity. Although the current situation is not that dire, Miller said the trend is real, and he presented how it is currently playing out and the long-term implications for office building owners and investors. 

Following the webinar, CoStar News interviewed Dr. Miller for a more in-depth discussion of the topic and surveyed a wide sample of webinar participants to share their firsthand account of the ongoing trend and its implications. 

According to Miller, four major trends are impacting the office market: 
* Move to more standardized work space. 
* Non-dedicated office space (sharing), along with more on-site amenities. 
* Growing acceptance, even encouragement of telecommuting and working in third places, and 
* More collaborative work spaces and functional project teams. 

“Historically, under the old corporate hierarchy, everyone had their own assigned office or work desk and we saw utilization rates of 50% or so,” Miller said. “Firms that have moved to sharing space are seeing much more efficient utilization rates of 80% to 95%, sometimes using conference space seats to handle unexpected overflow. Some also have arrangements with temporary office space vendors like Liquid Space, Regus, HQ, Instant Space, as well as supporting employees working from home or third places.” 

“The average amount of leased space (per employee) has been shrinking,” he said. “As of mid-2012 the average was 185 square feet per worker, well below the average space assumption in most office-demand models, and well below figures 10 years ago.” 

There have definitely been changes in office demand, agreed Tim Wang, director and head of investment research for investor Clarion Partners in New York. 

“Ten years ago, 250 square feet per office employee was the gold standard in office real estate. Today, that average has dropped to approximately 195 square feet. While some office tenants are hesitating to commit to large leases primarily due to economic uncertainties, the long-term trend is clearly shifting towards efficient space usage.” 

Brian J. Parthum, who tracks employment and economic trends for Southeast Michigan Council of Governments (SEMCOG) in Detroit, said his group is a case in point. 

Our own organization recently moved into a smaller space,” Parthum said. “Efficient office design has allowed us to rent 7,000 square feet less space -- down from 34,000 square feet -- and at a lower rate. Additionally, we now have an office that is more attractive to the next generation of staff. The new space takes advantage of natural light, promotes face-to-face contact, and utilizes laptops, wireless technology, and mobile devices to allow for a more flexible work environment.” 

“Technology is allowing companies to be more paperless and work from a single laptop or device," agreed Jason Lewis, president and managing broker of EcoSpace Inc. a brokerage firm in Denver that specializes in working with tenants to find sustainable workplaces. "Culturally the new generation of employees is requiring a more flexible and open environment. And in regards to the economics, there is the need for both startups and corporations to lower their burn rate and conserve cash, something that can easily be done by restructuring the way they view their office space,” Lewis said. 

For now, at least, the trend is more prevalent among large corporate office users with locations in multiple cities. John G. Osborne, executive director, leasing and marketing at Bergman Real Estate Group in Iselin, NJ, said also that the trend to shared office space is more prevalent among larger publically traded companies than smaller firms. 

 “The majority of our smaller tenants, those that lease less than 5,000 square feet, still prefer private offices than an open plan,” noted John G. Osborne, executive director, leasing and marketing at Bergman Real Estate Group in Iselin, N.J. 

For many office-using firms, the Great Recession made downsizing a greater imperative. Occupancy rates dropped across the country as employers downsized staff and sought efficiencies through lower square foot per employee footprints. 

“Everything we’ve seen since 2006 and 2008 could be called the ‘Great Deleveraging,’” said Wilson Greenlaw, vice president of Thalhimer in Fredericksburg, VA. “Companies were removing fluff and eventually someone got around to looking at space utilization. Now that it is on the table, it will be maximized and implemented, resulting in a cultural shift for the office worker.” 

“Some of it is economic," agreed Miller. "That is, companies realized they could save money by minimizing excess space. But I believe the single biggest factor driving this trend is technology. Now that we have moved to cloud-based file storage and can access our work from anywhere and it can be easily shared, workers no longer have to be tethered to an office to be productive. Technology is very much at the heart of this transformation.”