Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.ibd From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: Executive Update Date: Tue, 17 Nov 92 12:53:40 EST Message-ID: <2.1992Nov17.125340@AmeriCast.com> 11/17/92 TITLE Executive Update For Building Owners, Economy Offers Little Cheer Downtown Vacancies Still At Record Highs, Though Suburbs Faring Better Robert Corrigan The nation's supply of downtown office space continues to outpace demand, and a turnaround in most markets is still years away. Downtown office vacancy rates across the country stood at 17.6% in the third quarter, up slightly from the second quarter and more than a full percentage point above the same quarter in 1991, according to a quarterly Real Estate survey of commercial real estate vacancy rates released last week by Torto Wheaton Research, a unit of CB Commercial Real Estate Group Inc. Vacancy rates remain at all-time highs. Eleven years ago, down- town office vacancies ran under 5%, but the building boom of the 1980s took rates far higher. "What's happening right now is that there's very little increase in net absorption, and vacancy rates should stay high for quite a while," said Randy Zisler, managing director of Pension Consulting Alliance Inc. in Princeton, N.J. Zisler says rates are unlikely to fall under 15% before 1997. "Rates of total return (to building owners) in real dollars will be negative or close to zero," he predicted. Charles Wurtzebach, managing director of research at JMB Institu- tional Realty Corp. in Chicago, says the nation's mild economic recovery "is not going to result in near-term large increases in office-based employment. Figures from several major markets show the weakness of demand. Los Angeles' downtown vacancy rates stood at 19.4% in the third quarter, up sharply from 12.7% just two years earlier. Downtown Manhattan registered 20.6%, higher than the 16% reported in the same quarter of 1990. Miami had the highest level of vacancies among major cities, with a rate of 27.2%. "Rates have just about peaked and should stay flat for at least three more years," Wurtzebach said. Suburban Vacancy Rates The CB Commerical survey also found that suburban vacancy rates continued to decline in the third quarter, dropping to 19.8% from 20.2% the quarter before and registering below last year's aver- age rate of 20.8%. Unlike downtown rates, suburban rates have been heading down for almost six years. "These rates are hiding a little of what's going on underneath," said Raymond G. Torto, principal of Boston-based Torto Wheaton Research. In some downtowns, new buildings are still coming on the market, though there are fewer of them. But nationwide, "the suburban market stopped building four years ago," Torto said. Suburban market rates thus are coming down as supply is slowly used up. There also has been a modest move from downtown to suburban markets, which has eaten up more space and kept prices firmer in suburban areas than in downtowns. "It's certainly not the case that there's a flight to the subur- ban markets," just a steady trickle, said Joel Stoesser, senior portfolio manager of real estate at Prudential Realty Group in Newark, N.J. He notes that suburban areas remain more overbuilt than downtowns, as indicated by the CB Commercial report showing suburban vacancies about two percentage points higher than down- town vacancies. Stoesser says there's no hope that tenants ever will be interested in some suburban space that was poorly designed and built on speculation. "Some projects won't succeed even on a readjusted basis and will have to be razed," he said. Metropolitan Prices Down Other properties are going for lower prices. CB Commercial says the average annual rental price of office space per square foot in metropolitan areas, including both downtowns and suburbs, fell 2.5% last year and another 0.6% in the first half of 1992, reach- ing $15.10. Several markets have been hit especially hard. Boston suffered a whopping 9.2% price drop in 1991 to $16.96 per square foot. Prices were down another 3.2% in the first half of this year. CB Commercial also reported last week that industrial vacancy rates continue to rise but may have reached a ceiling after increasing steadily for more than a decade. During the third quarter, the overall industrial vacancy rate fell to 8.6% from 9% in the second quarter. But the rate was up from 7.9% in the same quarter a year earlier, and rates have been consistently trending higher for more than a decade. The region showing the most extra space continues to be the East, particularly areas near New York City and northern and mid-New Jersey. Vacancy rates in those areas range from 13% to 16%. Within the industrial category nationwide, manufacturing space vacancies now stand at 8.6%. Vacancies of research and develop- ment space, which includes several types of mixed-use buildings, are at 15.4%, while distribution space vacancies are 14.2%. Changes In Warehouse Use The distribution category, which includes warehouses, is one of the strongest sectors of all real estate investment in the coun- try right now, says Torto. He notes that retail companies have revolutionized the way they store and transport goods, requiring that older, smaller warehouses be replaced by larger, better-designed facilities. Manufacturers are changing as well, using just-in-time and other delivery techniques that require new kinds of warehouse space. Wurtzebach points out that strong exports by U.S. companies in the last few years have helped fuel that market, especially in the Midwest. Of the four major regions, the Midwest posts the lowest industrial building vacancy rate, 7.4% as of the third quarter. This article is copyright 1992 Investors Business Daily. Redis- tribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM