Thursday, January 29, 2009

Surprising Real Estate Trends: 2008 and 2009

I've accumulated a few real estate facts about 2008 and a couple of projections about what may lie ahead. I was surprised by several of these points... let's see how many are news to you!

Leasing hasn't slowed down.
A chart of leasing historical leasing volume in 3 major east coast cities - Atlanta, DC, and New York, shows that leasing volumes have remained strong for several years now... irrespective of all of the other changes we're seeing. This counter-intuitive trend surprises most people.
The message: leases continue to expire, companies continue to relocate, and new leases are being signed. The downside is that deliveries and early lease exits are pushing the available space up, causing an increase in vacancy rates.

Companies are "Trading Up"
Absorption in Class C office space was negative last year, while Class A and Class B space saw positive absorption (meaning there was LESS space vacant at the end of the year than at the beginning of the year). In other words, volume is shifting from the less-nice to the nice and very-nice spaces. Presumably, prices are shifting downward, landlords are becoming more flexible, and tenants are trading up to get that space they've always dreamed of. The message: if you're a tenant with some lease flexibility, now is a GREAT time to look at space.

It takes a REALLY long time to find a tenant.
If you own a building and part of it goes vacant, how long do you think it will take to fill the space? In 4Q06, the average time a space was on the market before being leased was around 315 days. It's risen every quarter after 2006, with 4Q08 being 420 days (that's 1 year and 4 months in human years!). The message: landlords need to fight to keep their tenants and temper their expectations when vacancies occur.

It's taking MUCH longer to sell a property.
From 2005-2007, properties tended to be for sales for 260 days before going under contract. In 1Q08, the number of days began a steady quarterly climb, ending 4Q08 at 344 days. THAT is quite a rise. There are exceptions to these averages, such as the building I listed in March of 2008 and put under contract 6 weeks later, but those aren't to be counted upon. The message: owners must begin their sales process early and not count on quick flips.

Atlanta's net absorption losses for 2008 weren't terrible.
The metro ended 2008 with 200,000 more SF of vacant space than it began the year with (excluding new buildings completed). However, New York ended the year with 3.1 Million more vacant square feet. Los Angeles? Try 6.0M more vacant square feet. And these numbers don't include deliveries of new buildings! The message: there are still companies in those office buildings you see everywhere!

Vacancy Rates rose, but only slightly.
Atlanta's overall vacancy rate wrapped up only 1% higher than at the beginning of 2008. Again, that's not good, but it beats the heck out of Phoenix's 5% increase. The message: same as for the prior point.

Atlanta remains a great deal.
Rental rates began sliding in 4Q08, but Atlanta has always been a great deal compared with other major metro's. Aggregate average rental rates in Atlanta are now at around $20.38, ranking us as the 2nd most affordable of the USA's 20 largest markets. The most affordable was Detroit, at $19.60. The most expensive? New York City at $58.79 per SF per year (ouch).

Atlanta's employment projections stink the least.
How's that for a message - we stink the least. Of the top 10 markets I saw reported, two project gains - Houston and Dallas. These two cities project gains due to their roles in the energy sector. The other 8 were projected to lose jobs, with Atlanta losing a net of 21,000. The projected biggest loser? New York at 257,000 projected job losses.

How long will it last?
According to the chief economist at Texas A&M's Real Estate Center, in the USA's last four recessions, job losses continued an average of 17 months after the employment peak. If those trends hold, employment will pick up by May 2009. I know this is a big "if," but it's something to watch for.

I hope you find these statistics as interesting as I did. As always, I'm happy to help with further insights or to assist with your specific situation or question upon request.