Property TypeCast
By Victor Calanog
VICE PRESIDENT OF RESEARCH AND ECONOMICS, REIS INC.
third-quarter jitters for the office sector
In this past September’s column ( sctsm.in/4748), we discussed how the first half of 2011 appeared promising for office properties. Third-quarter results show that the pace of recovery continued. Vacancies declined by 10 basis points from 17. 5 percent in the second quarter to 17. 4
percent in the third. Occupied space increased by roughly 6 million square feet, with positive
leasing activity speeding up relative to the first half — occupied space increased by 5. 9 million
square feet in the first quarter and 4 million square feet
in the second. OFFICE NET ABSORP TION AND VACANCy
There is, however, some
cause for concern. Although quarterly trends
argue that recovery is gaining some traction, monthly
data actually suggest the
opposite: a slowdown in
leasing activity that reflects the economic disruptions of the past few
months. Net absorption
in September was roughly
1 million square feet, down
from 2 million square feet in August and 3 million square feet in July.
Source: Reis Inc.
We should not de-emphasize positive developments that show improvements in the office
sector’s health. First, completions increased in the third quarter, with about 3 million square
feet of new office space coming online despite tight credit conditions and market jitters.
Second, rents also have increased fairly consistently in the past four quarters, albeit at less-than-spectacular rates. Asking- and effective-rent increases of 0.4 percent and 0.6 percent in
the third quarter are virtually on par with those observed in the first quarter, when it appeared
that the employment situation and the economy were gaining momentum. The ongoing increases in asking rents demonstrate that, despite the economy’s struggles in 2011, landlords
remain confident enough about their prospects to move beyond adjusting concessions and
continue to increase face-level asking rents.
The question now is whether prospects of slower global economic growth have dampened
employer expectations. Third-quarter job creation slowed significantly relative to the first half
of the year, and consensus
gross-domestic-product
(GDP) growth projections for 2011 now hover
between 1.5 percent and
1.7 percent. That represents less than half the
GDP growth that employers
expected at the beginning
of the year, when various forecasters projected
growth rates of 3. 5 percent
to 4 percent.
12-MONTH CHANGE IN EMPLOyMENT
If employers scale back on
their expectations of how
busy things will be in the
near term, they may hire
fewer people and suspend plans for leasing new space. This will constrain the office sector’s
nascent recovery, which has been fragile to begin with.
Source: Bureau of Labor Statistics
Reis projects a fairly conservative trend downward to a 17. 3 percent vacancy rate by the end of
this year, with absorption and rent growth remaining positive. Fundamentals appear to have
stopped deteriorating, but recovery remains painfully slow.
Victor Calanog, vice president of research and economics at Reis Inc. ( reisreports.com), writes a monthly column
on property types for Scotsman Guide. He and his team of economists are responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at victor.calanog@reis.com.
Lanyon Blair, sector analyst for Reis’s quality-control department, contributed to this article.
QA&
Annemarie G. DiCola CEO TREPP LLC
BY RANDALL WOODS
This past year started out strong for the commercial
mortgage-backed securities (CMBS) industry, but issuance ran into a snag because of a setback in the
global economy and fallout from the European debt
crisis. We spoke with Annemarie G. DiCola, CEO of
CMBS research firm Trepp LLC, to see where the market is headed in the coming year.
CMBS delinquencies have fluctuated lately.
Has the market finally stabilized?
It has somewhat stabilized, but we haven’t hit bottom yet. We were feeling pretty good in the early half
of the year because there was a pickup of issuance.
You started to see conduit groups reforming and
beginning to lend. But what happened in the summertime was a confluence of events — you had our
own issues in our broader economy, and you had the
news from Europe. Unfortunately, when you have
such global economic concerns, the general economic reaction is to hold things close to the vest.
How are today’s “CMBS 2.0” deals different
from “CMBS 1.0” deals?
If you look at the general bond structures of CMBS
2.0 vs. 1.0, the structures are relatively similar, but in
2.0, the loans backing the bonds are generally simpler than the loans that backed the bonds in the 1.0
deals. A lot of these new features came out of some
experience with 1.0 deals that had some troubled-asset issues. But since these 2.0 deals are relatively
new, it’s going to take some time for the 2.0 infrastructure to be tested — hopefully it won’t be.
What is Trepp’s forecast for CMBS issuance
volume in 2011? Will this improve in 2012?
A lot of people thought that this market might reach
upward of $50 billion for this year. We are now looking to be coming out at around the $30 billion mark.
That is more than [what] was issued in 2010, which
was $12.7 billion, and in 2009, which was essentially zero. Honestly, it’s below what it needs to be
for a long-term sustainable market. We estimate at
Trepp that in 2012 roughly $75 billion worth of loans
in CMBS will be maturing. You would like to see issuance of at least that level in order to handle the refinancing needs of loans that are just in CMBS.
How can health be restored to this market?
In the international environment, I think the best
thing that would help is to hear the European leaders introduce a plan for their debt-crisis solution. I
think just the idea that there is a plan and a set of
steps would do a great deal to help restore confidence that some progress is going to be made. From
a domestic point of view [this summer], legislators
in Washington could not show that they could get
something done smoothly and effectively. I think
that needs to change in order to restore confidence.
Confidence goes a long way to encouraging businesses to take steps — there’s no doubt about it.
Randall Woods is editor at Scotsman Guide.
