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Are Commercial Property Markets Cooling Off


									                SIOR Summer Survey
                   Charts a Dip:
                Are Commercial
               Property Markets
                   Cooling Off –
                      and for How Long?
                                      By Hugh F. Kelly, CRE

                                         Everyone wants a “tip” on the         finish the first annual round of sur-
                                      market and, at one point in history,     veys in the SIOR Index, we con-
                                      who would have been better to ask        tinue to learn how to interpret such
                                      than financier J.P. Morgan? Of           findings.
                                      course, tycoons don’t amass their
                                      wealth by freely sharing their           What Does the Decline in the
  Hugh F. Kelly, CRE, Brooklyn,       secrets, and so when Morgan was          SIOR Index Mean?
  New York, an economics con-         asked what was in store for the          The SIOR Commercial Real Estate
  sultant and clinical Professor in   stock market, he memorably (and          Index retreated 0.90 points in the
  New York University’s master’s      cryptically) observed, “It will          July survey. The national index
  degree in real estate program,      fluctuate.”                              slipped to 118.80 from its May
  was formerly with Laudauer             Fluctuation is a feature of mar-      2006 level of 119.70. We compare
  Real Estate Consultants. Hugh       kets, as much in real estate as in       these results with 119.40 in
  worked on SIOR’s Comparative        stocks, even in the midst of longer-     February 2006 and 115.75 in
  Statistics project for more than    range trends. So we shouldn’t be all     November 2005. An Index Value of
  12 years.                           that surprised to find that in its       100 reflects well-balanced commer-
                                      fourth quarterly survey taken in         cial real estate conditions. Values
                                      July 2006, the SIOR Commercial           greater than 100 represent strong
                                      Real Estate Index registered its first   market conditions favoring existing
                                      retreat, after gaining in both its       owners, as landlords and as sellers
                                      January and April results. A modest      of properties. Values below 100
                                      decline was tallied in the overall       indicate favorable negotiating con-
                                      index, in both the office and indus-     ditions for tenants and for those
                                      trial sub indexes, and in two of the     looking to acquire real estate. The
                                      four regions of the country. As we       relatively narrow range for the

professional report                                                                                          Fall 2006
                                                                         strong for sellers and very
                                                                         healthy for lessors, but absorp-
                                                                         tion has weakened this year.
                                                                         Time will tell if it is just the
                                                                         usual summer slump or some-
                                                                         thing more pervasive.”
 Marten Barry Jr   Lawrence Null      John Skoglin   Joseph Steffner
                                                                             Joseph L. Steffner, CCIM,
index in the last three surveys      appear to be in line for a market   CPM, SIOR, Steffner
reveals growing caution in the       adjustment due to rising interest   Commercial Real Estate,
face of a more uncertain U.S.        costs coupled with increases in     Memphis, Tennessee, President
economic outlook. And yet the        rent and increases in asking        of SIOR’s Memphis Chapter, also
level of the overall index, at       prices! Something has to give due   sees a seasonal pattern, saying,
118.80, still indicated healthy      to this dichotomy!”                 “The Memphis industrial mar-
conditions for the industry.            Other survey participants sus-   ket, including North Mississippi,
   The index was compiled from       pect that there is some season-     has an ongoing love affair with
survey responses from more than      ality at work in their market-      the second half of every year.
400 SIOR designees in late July.     places.                             During the third and fourth
Many of their comments shed             From Southern California,        quarters, leasing activity typically
light on the numerical results. In   Marten Barry Jr., SIOR, NAI         kicks in for big-box warehouses
some cases, market participants      San Diego, San Diego,               and the market absorbs a large
may simply be adjusting to the       California, reports, “The San       chunk of the vacancy. We’re
strong conditions by tempering       Diego market has been extremely     expecting that same pattern to
behavior. Lawrence C. Null,                                              hold for 2006.”
SIOR, Lee & Associates,
Riverside, California, says,
“It’s not the feeding frenzy
that we saw two years ago
when everyone wanted to
buy, but we still have strong
demand in relationship to
minimal supply.”
   Some respondents feel
that market imbalances
which have been present in
the past year are now being
felt more acutely. One
Chicago respondent noted,
“There is a severe bifurca-
tion between values for leas-
ing and those for sale. User
and investor sale prices are
at all-time highs, while leas-
ing prices are significantly
discounted. Someone’s
going to get hurt.”
    John G. Skoglin, SIOR,
CB Richard Ellis, Baltimore,
Maryland, remarked, “We

Fall 2006                                                                                      professional report
     Perhaps, though, the slippage
                 portends some-                                                                            Summer 2006 SIOR Commercial
                 thing more signifi-                                                        Real Estate Survey Shows a Cooling Trend
                 cant. Paul S.
                 Hoge, SIOR,                                                                              125
  ONCOR International,                                                                                    115

  Southfield, Michigan (Detroit),                                                                         110
  indicated that “Vacancy periods
  have been lengthening, rental
  rates and sale prices are off their                                                                     100
                                                                                                                   Total Index             Office            I
  highs of 2000-2001, and there is
                                                                                                                         Nov. 2005 Feb. 2006    May. 2006 Aug. 2006
  hesitancy in the marketplace.”
     The Midwest might be consid-                                                                 Source: Hugh F. Kelly Real Estate Economics for SIOR
  ered a soft spot, as one Ft.
  Wayne respondent described,                                         vacancy are both healthy at                                              noted, “Our manufacturing sec-
  “The Class ‘A’ suburban market                                      12.12 and 14.9 percent,                                                  tor continues to remain soft with
  is experiencing the slowest                                         respectively.”                                                           little relief in sight.”
  activity in many years. This is                                         There are signs that markets                                             Such concerns might appear to
  due to the loss of national ten-                                    on the East Coast are also feeling                                       overwhelm the still-positive
  ants as a result of downsizing,                                     the pain of structural change.                                           results represented by the overall
  outsourcing, and mergers. The                                       From Fairfield County, Connecti-                                         index, so it is helpful to hear
  medical office market remains                                       cut, came the comment, “Typical                                          from Paul Hoge, who says,
  stable and the educational office                                   industries have left the area and                                        “Contrary to the doom and
  market is strong.” And a                                            industrial buildings are back-                                           gloom that you read in the press,
  Cincinnati participant says,                                        filled with service-type compa-                                          there are deals being made, and
  “Mid-year 2006 demand is much                                       nies. Currently, with the high                                           there is business to be had. The
  less than the demand level in                                       cost of materials and construc-                                          Metropolitan Detroit area is
  2005. Almost zero net absorp-                                       tion cost, the rent needed to                                            alive and well.”
  tion has occurred, with almost                                      justify dividing a large industrial                                          The “cooling” in the SIOR
  three million sq. ft. of gross leas-                                complex has gone up consider-                                            Commercial Index, after all,
  ing. Bulk warehouse and flex                                        ably.” A Philadelphia SIOR                                               amounts to less than one point—
                                                                                                                                               not especially significant statisti-
                                                                                                                                               cally—and one observation does
              SIOR Index and the Index of Leading                                                                                              not constitute a “trend.” But it is
             Economic Indicators Tell a Similar Story                                                                                          interesting to note that the SIOR
                                                                                                                                               Index and the widely-followed
               122                                                                                                        140
                                                                                                                                               Index of Leading Economic
               120                                                                                                        139
                                                                                                                                               Indicators published by The
               118                                                                                                        138                  Conference Board tell a consis-
               116                                                                                                        137                  tent story of a somewhat slowing
               114                                                                                                        136
                                                                                                                                               U.S. economy. Perhaps this
               112                                                                                                        135
                                                                                                                                               should not come as a major
                                                                                                                                               shock, given the run of interest
               110                                                                                                        134
                             Sept.   Oct.   Nov.   Dec.   Jan. 2006   Feb.       Mar.      Apr.     May    June   July
                                                                                                                                               rate increases imposed by the
                                                     SIOR Index       Leading Indicators                                                       Fed through the end of the
            Sources: SOCIETY OFINDUSTRIAL ANDOFFICE REALTORS (SIOR Index);                                                                     spring. With signs of weakening
            The Conference Board (Index of Leading Economic Indicators)
                                                                                                                                               growth accumulating during the
professional report                                                                                                                                                        Fall 2006
                                                                                                                             of a rapidly changing market
                           Data Scores                                                                                       environment.
                   SIOR Commercial Real Estate Index                                                                            Industrials had the advantage
                               Property Type Comparison August 2006
                                                                                                                             over offices in six of the 10 top-
        Leasing Activity                                                                                                     ics covered in the survey. The
                                                                                                                             industrial sector posted substan-
               Sublease                                                                                                      tially higher scores in the areas
            Concessions                                                                                                      of sublease impact and leasing
                                                                                                                             concessions, in survey questions
             Sales Price
                                                                                                                             relevant to the landlord/tenant
              Local Eco                                                                                                      bargaining table. Development
               Natl Eco
                                                                                                                             patterns were also more favor-
                           0   2      4      6        8         10          12            14        16                       able for industrials than for
                                                                                                                             offices, as seen in the excess of
                                             Office       Industrial
                                                                                                                             sales prices over development
            Source: Hugh F. Kelly Real Estate Economics for SIOR
                                                                                                                             costs and in the volume of new
summer, and the sense that the                   and development activity, offset                                            construction appearing in the
Fed’s anti-inflation policies may                by improvements in leasing                                                  marketplace. Industrials also
be gaining traction, we may sim-                 activity, higher rents, fewer leas-                                         edged out offices, by narrower
ply be in a period where real                    ing concessions, and a reduction                                            margins, in the amount of leas-
estate is just taking a breather                 in inventory in the sublease mar-                                           ing activity and in the influence
until the outlook for the coming                 ket. None of the changes in the                                             of local economic conditions on
year or two becomes clearer.                     national index or the property                                              the market.
   One thing seems evident, how-                 type sub indexes were dramatic                                                 Offices, on the other hand,
ever. The new SIOR Commercial                    in scale. The data should be                                                registered sharper improvements
Real Estate Index seems sensitive                interpreted as showing reason-                                              in rent and in lower vacancies.
enough to capture what might be                  ably stable conditions for com-                                             Site prices for new office con-
a fairly subtle shift in market                  mercial real estate, neither over-                                          struction were seen to be soaring
psychology and market behavior.                  heating nor cooling through the                                             by our respondents, and they
That bodes well for the Index’s                  first half of 2006. Under such                                              rated the national economy
usefulness to investors, develop-                conditions, buyers and sellers, as                                          slightly higher as a positive influ-
ers, and space users as we con-                  well as landlords and tenants,                                              ence on their markets than did
tinue the survey process in the                  can negotiate without the duress                                            the industrial survey participants.
                                                                       Both SIOR and Purchasing Managers
Property Types                                                              Index Register Industrials
Both industrial and office prop-                                               Softening Modestly
erty sub indexes weakened.                                           124                                                                                               59

Industrials dipped 1.32 points to                                    122                                                                                               57

120.92 and offices declined 1.07                                     120                                                                                               55

points to 116.34. Both property                                      118                                                                                               53

types, it should be stressed,                                        116                                                                                               51

remained in moderately strong                                        114                                                                                               49

territory. The lower scores were                                     112                                                                                               47

the composite result of negative                                     110
                                                                           Aug.   Sept.    Oct.   Nov.   Dec.   Jan. 2006    Feb.    Mar.   Apr.   May   June   July

changes in evaluations of the                                                                                   SIOR Index      ISM-PMI

national and local economies,
                                                                Sources: SOCIETY OFINDUSTRIAL ANDOFFICE REALTORS (SIOR Index);
investment pricing conditions,                                  Institute of Supply Management (PMI – Purchasing Managers Index)

Fall 2006                                                                                                                                                        professional report
                                                                                             Elsewhere, industrial
                          Data Scores                                                     respondents gave similar-
               Overall Commercial Real Estate Index                                       ly hedged viewpoints.
                                                                                          One Midwest SIOR says,
        Leasing Activity
                                                                                          “The velocity of large
                                                                                          industrial users in the
                                                                                          Cincinnati market has
           Concessions                                                                    slowed dramatically
                Building                                                                  since last year. I believe
                   Sites                                                                  there are several reasons.
             Sales Price
                                                                                          First, demand seems to
              Local Eco
                                                                                          have slowed somewhat
               Natl Eco
                                                                                          in many markets.
                         0   2       4      6      8       10     12      14     16       Second, the supply of
                                                                                          good space has dwindled
                               Nov. 2005 Feb. 2006 May-06 Aug. 2006
                                                                                          due to the spectacular
          Source: Hugh F Kelly Real Estate Economics for SIOR
                                                                                          year of absorption in
                                                                                          2005. This fact along
   The anecdotal comments we received help fill               with increased construction costs have caused a
out the picture sketched by the numerical results.            rise in lease rates, which may have kept some ten-
                   David J. Murphy Jr., CCIM,                 ants on the sidelines until they absolutely have to
                   SIOR, CB Richard Ellis, Orlando,           make a move. However, a number of new bulk
                   Florida, offers this insight, “The         facilities are coming out of the ground this summer
                   Orlando industrial market is
                   the strongest it has been in
                   10 years. Vacancy rates have
dipped below five percent. Rental rate
increases have lagged behind land and
building price appreciation. We expect rates
to escalate dramatically in the second half
of 2006 as demand continues to outstrip
   In Atlanta, Georgia, Craig S.
                   Viergever, SIOR, Bryant
                   Commercial Real Estate
                   Partners, provides this
                   nuanced perspective, “Our
                   industrial market currently is
                   experiencing healthy and
steady leasing activity. Increased construc-
tion costs coupled with relatively stagnate
rental rates have resulted in a significant
slow down of speculative construction.
Oddly, the appetite for land remains strong
with many developers delaying new con-
struction until the market exhibits measura-
ble rental rate growth.”

Fall 2006                                                                                            professional report
                                                                                                         The once-troubled San
                                                                                                      Francisco market now
                                                                                                      finds itself on a solid
                                                                                                      upward trajectory, as John
                                                                                                      E. Casey, SIOR, Colliers
                                                                                                      International, San
  Dandridge Adamski Warren Arnett Jr. Michael Capobianco      John Casey       J. Jeffrey Castell
                                                                                                     Francisco, California, tells
                                                                                                     it, “The office market has
  which will give local and nation- in terms of new construction
                                                                                            had 11 consecutive quarters of
  al tenants excellent options in            (both spec and build-to-suit),
                                                                                            positive absorption. Downtown
  our market during the second               demand, and absorption.”
                                                                                            Class ‘A’ rents increased by 13
  half of 2006.”                                On the West Coast, Stockton,
                                                                                            percent last quarter, and no new
     Such variables were also cited          California’s Gregory O’Leary,
                                                                                            buildings will be added to the
  by Glenn L. LeGrand, SIOR,                 SIOR, Colliers International,
                                                                                            Financial District within the next
  NAI LeGrand & Company,                     chimed in, “Industrial land val-
                                                                                            three years.”
  Sioux City, Iowa, who states,              ues are spiking as a result of a
                                                                                                The bounceback is less robust
  “The Sioux City industrial mar-            shrinking inventory. Developers
                                                                                            in other parts of the U.S.,
  ket is generally stable, with              would rather build out projects
                                                                                            although the outlook is positive.
  smaller companies continuing               and as a result, it is becoming
                                                                                            Dandridge J. Adamski, SIOR,
  slow but steady growth while               more difficult for users to
                                                                                            Jones Lang LaSalle, Pittsburgh,
  larger corporations experience             acquire a finished site at a rea-
                                                                                            Pennsylvania, observes, “The
  consolidations and downsizing.             sonable price.”
                                                                                            Pittsburgh CBD market has sta-
  Vacancies are normal. Land val-
                                                                                            bilized, with office vacancy rates
  ues are increasing and most new            Office Growth                                  bottoming out and expected to
  construction is owner-occupied,            On the office side of the ledger,
                                                                                            decrease slightly in the next 12
  with little speculative                    rental growth and tightening
                                                                                            months. There will be pressure
  development.”                              vacancies were the mainstays of
                                                                                            to increase rental rates as tax
     Greater enthusiasm was gener- this quarter’s expert SIOR com-
                                                                                            and operating expense increases
  ated by Michael R. Capobianco,             mentaries. San Diego, Califor-
                                                                                            continue to affect landlords’ bot-
  SIOR, Markward Group,                      nia’s Warren J. Arnett Jr., SIOR,
                                                                                            tom lines.”
  Allentown, Pennsylvania, in                Burnham Real Estate/ONCOR
                                                                                                Dayton, Ohio’s Anthony P.
  describing his market area, “The International, has this to say:
                                                                                            Witt, CCIM, SIOR, Colliers
  economy and industrial real                “We have a strong office market.
                                                                                            Turley Martin Tucker, tells of
  estate market in the Lehigh                While there is a significant
  Valley and east central and                amount of new
  northeast Pennsylvania is in a             construction, pre-
  boom. Spec buildings of 200,000 leasing has been
  to 500,000 sq. ft. are the norm.           substantial. Of the
  Tenants and users recently active 4.2 million sq. ft.
  include Coca-Cola, ADM,                    under construc-
                                                                       Glenn LeGrand              Gregory O’Leary      Anthony Witt
  Wakefern, and Home Depot.”                 tion, 36 percent is
     Development is also active in           built-to-suit or for
                                                                                            “significant office demand
  central Indiana, according to              owner/users. Of the 2.7 million
                                                                                            growth in the area surrounding
   J. Jeffrey Castell, CCIM, SIOR,           sq. ft. of spec construction,
                                                                                            Wright Patterson Air Force Base
  Colliers Turley Martin Tucker,             460,000 sq. ft. is pre-committed.
                                                                                            (east Dayton market). Once out-
  Indianapolis, Indiana, who com- Time will tell how deep the mar-
                                                                                            side this submarket, office activ-
  mented, “Modern bulk ware-                 ket is. Conces- sions to tenants
                                                                                            ity remains stable.”
  house space continues to fuel the are low but there appears to be
                                                                                                Larger economic forces affect
  central Indiana industrial market reasonable balance in negotiations.”
                                                                                            both large and small markets.
professional report                                                                                                       Fall 2006
                                                                             phase and off of
                                                                             the 2002 lows.
                                                                             Rents are higher
                                                                             and proposals
                                                                             have annual
                                                                             increases from
  Stan Kurzweil               Curtis Loftin                  Robert Nahigian
                                                                                Optimistic com-
   Stan Kurzweil, SIOR, Colliers
                                                               ments are often tempered by
Houston & Co., Somerset, New
                                                               issues that still need to be
Jersey, notes that in the Central
                                                               addressed. From Jacksonville,
New Jersey suburban markets,
                                                               Florida, Curtis W. Loftin,
“factors such as increases in
                                                               CCIM, SIOR, Beacon Realty
energy as well as the geopolitical
                                                               Services, writes, “Our local
environment have made corpora-
                                                               economy continues to be
tions more tentative in their
                                                               healthy, driven in large part
commitment for increased office
                                                               by homebuilding and related
space. Transactions are taking
                                                               businesses. Since a significant
longer to complete and the finan-
                                                               portion of our office space is
cial strength of prospective buy-
                                                               occupied by mortgage related
ers is weaker than the past two
                                                               businesses, rising interest
years. Although there are fewer
                                                               rates could have a negative
user/buyers for property than in
                                                               effect on near-term occu-
the past, the sales market is more
                                                               pancy rates. As in the rest of
active than the leasing market.”
                                                               the state, the biggest chal-
   Although New England is still
                                                               lenges to continued prosperi-
struggling to a degree, Robert J.
                                                               ty for our market are rapidly
Nahigian, CRE, FRICS, SIOR,
                                                               rising insurance costs and
Auburndale Realty, Newton,
                                                               more stringent building
Massachusetts, says, “The office
                                                               code criteria.”
market is clearly in a recovery

               SIOR Office Index and ISM
            Non-Manufacturing Index Confirm
             Summer Economic Slowdown
      118                                                                                                     70

      117                                                                                                     60




      111                                                                                                     10

      110                                                                                                     0
            Aug.   Sept.   Oct.   Nov.    Dec.   Jan. 2006   Feb.     Mar.         Apr.   May   June   July

                                         SIOR Index     NonMfg Business Activity

   Institute of Supply Management (Non -Manufacturing Business Activity)

Fall 2006                                                                                                          professional report
     William C. Barden, CCIM,
  CPA, SIOR, Barden Commercial
  Realty, Memphis, Tennessee, tells       Two Regions Up, Two Down As BiCoastal
  us, “Suburban Class ‘A’ office is         Advantage Eases in Summer Survey
  very tight with few if any large
  blocks of space. However, Class              150
  ‘B’ office is still plentiful with           130
  numerous options in different                110
  submarkets, especially for the                90
  local tenant.”                                70
     Even in booming Las Vegas,                 50
  Nevada, there is some spottiness              30
  in the numbers, “The vacancy                  10
  rate for the second quarter of               -10
                                                      Northeast      Midwest         South         West
  2006 jumped to 9.5 percent from
  8.4 percent at the end of first                        Nov. 2005   Feb. 2006   May. 2006   Aug. 2006
  quarter 2006. Approximately 1.2       Source: Hugh F. Kelly Real Estate Economics for SIOR
  million sq. ft. of new product
  came on line in the second quar-     economic reality, and extreme                  As James J. Stanulis, SIOR,
  ter. However, the Las Vegas          regional variations in perform-             Colliers Dow & Condon,
  Valley office market is projected    ance tend to be cross correcting            Hartford, Connecticut, put it,
  to have its second highest net       over time.                                  “Our engine is revving, but the
  absorption year in history for
                                                                                   gearbox is still in neutral.”
  2006,” according to Charles W.
  Witters, SIOR, Lee & Associates.
                                       Northeast Region                            Development sites are very
                                       The Northeast Region, covering              expensive and many markets are
     Thus, our survey statistics
                                       the area from Maine to                      still at the point where new
  appear to capture mixed emo-
                                       Washington, DC, dropped 2.57                buildings are not economical to
  tions from SIOR’s experienced
                                       points in its index performance,            construct. The August decline
  market professionals, who know
                                       to 112.21. Interestingly, the eval-         was the second straight quarterly
  just how fickle fortune can be as
                                       uation of local economic condi-             sag in the Northeast’s score.”
  the wheel of the business cycle
                                       tions was one of three scores                  Some of the smaller office
  turns from one phase to the next.
                                       edging up over the most recent              markets clearly display positive
                                       quarter, with leasing activity              signs. Kevin C. Geenty, SIOR,
  Regional Performance                 improving                                   The Geenty Group, REALTORS®,
  Shows Convergence                    and sub-
  The extremes of regional per-        leasing
  formance, which had been             inventory
  widening over the early itera-       tightening
  tions of the SIOR survey, con-       as well.
  verged this summer. The top-per-     The other
  forming Western region pulled        seven sur- William Barden    Kevin C. Geenty   James J. Stanulis Charles Witters
  back, as did the Atlantic Sea-       vey ele-
  board in the Northeast. The          ments had softer scores, though.         New Haven, Connecticut, says,
  South gained ground, and the         New York City and Washington             “We have had a good commer-
  economically troubled Midwest        remain robust markets, but               cial real estate business climate
  markets edged upward during          regional development is still            for the past five years. From the
  the past quarter. Demographic        weak and tenants retain bargain- beginning of that moderate
  and business mobility are an         ing leverage in lease negotiations. upswing, the national pundits
  embedded feature of American
professional report                                                                                             Fall 2006
                                                                                       years, with continued landlord
                                                                                       gains and decreasing tenant
                                                                                       leverage. This is coupled with
                                                                                       moderate development activity,
                                                                                       and so we are seeing rental rate
                                                                                       increases due to both increased
  John Clark      Jeffrey H. Gage   Jeremy Kronman    Del Markward   William O’Brien
                                                                                       demand and supply constraints.
                                                                                       It is a pretty healthy, long-run
have been forecasting a down-               in the foreseeable future, and
                                                                                       situation, with more velocity
turn and doom. With the recent              rental rates should increase
                                                                                       than typical.”
rising interest rates it does now           moderately.”
                                                                                          Mixed reports are flowing in
appear that we are headed for                  In Brooklyn, New York’s
                                                                                       from the Northeast industrial
the slowdown, five years after it           expanding office sector, across
                                                                                       markets. On the plus side of the
was predicted.” Nearby in                   the bridge from Lower
                                                                                       ledger comes this sketch from
Stamford, Connecticut, Jeffrey              Manhattan, William P. O’Brien,
                                                                                       Del C. Markward, SIOR,
H. Gage, CCIM, SIOR, Albert B.              SIOR, M.C. O’Brien, reports,
                                                                                       Markward Group, of Allentown,
Ashforth, cheers, “We are excited           “The leasing market continues at
                                                                                       Pennsylvania, “There has been a
about the start of construction of          a strong clip. The sales market
                                                                                       steady influx of residential
the 600,000 sq. ft. Royal Bank              for well-positioned assets or
                                                                                       growth from the New Jersey
of Scotland headquarters, and               properties with significant rede-
                                                                                       market into the Lehigh Valley
the impact that will have on our            velopment potential continues to
                                                                                       and, with it, moderate and con-
market.”                                    move upward to levels that
                                                                                       tinuous growth of retail, indus-
   Meanwhile, in upstate New                would not have been predicted
                                                                                       trial, and office. The warehouse
York, John L. Clark, SIOR, NAI              three or four years ago.”
                                                                                       market is strong and steady
Pyramid Brokerage Co. of                       Meanwhile, in Pittsburgh,
                                                                                       absorbing most of what is avail-
Syracuse, of Syracuse, New                  Pennsylvania, Jeremy Z.
                                                                                       able within 12 months, but new
York, remarks, “The suburban                Kronman, CCIM, SIOR, CB
                                                                                       product continues to keep pace.
Syracuse market has enjoyed                 Richard Ellis/Pittsburgh, indi-
                                                                                       Demand is coming from all over
moderate growth over the past               cates, “We are seeing a sustained
                                                                                       the United States. Land prices
three years. We do not expect               increase in leasing activity, more
                                                                                       have risen by 25 percent over the
any substantial new development             than experienced in the last five
                                                                                       last two years and more than

                            Property Types                                                Regions
                    National Index Industrial                   Office Northeast         Midwest     South          West
   Leasing Activity     11.22        11.23                      11.16    9.93             8.50       13.12          12.35
   Asking Rents         13.36        13.14                      13.72   12.36            10.64       14.54          15.25
   Vacancy              13.41        13.20                      13.69   12.36            11.73       14.69          14.17
   Subleasing           13.89        14.34                      13.17   13.29            12.85       14.43          14.71
   Concession            9.58        10.24                       8.48    9.21             6.78       10.50          11.44
   Development           8.94         9.51                       8.06    7.71             7.12       10.46           9.61
   Site Acquisition     13.82        13.98                      14.55   13.84            11.10       14.30          15.88
   Investment Pricing 10.40          11.03                       9.47   10.82             9.10       10.39          11.42
   Local Economy        12.58        12.73                      12.31   11.50             9.41       14.27          14.31
   National Economy 11.59            11.51                      11.73   11.19            10.25       12.38          12.55

   Index Totals             118.80           120.92             116.34   112.21           97.48     129.08        131.68

Fall 2006                                                                                                    professional report
                                                                                                                 Index survey
                                                                                                                    In some of the
                                                                                                                 smaller office
                                                                                                                 markets around
                                                                                                                 the regions,
     David Bercu      Kevin Crowley   J. M. Hamilton   Richard Sleasman   Margery Stratton     Bruce Wettenstein
                                                                                                                 things appear to
  200 percent over the last 12               Midwest Region                                  be brightening in the summer of
  years. Our market will stay                The struggling Midwest Region                   2006. J. M. Hamilton, CCIM,
  strong because New Jersey and              picked up 0.37 points in it                     CPM, SIOR, Hamilton Real
  New York land is scarce and                regional index, but remained, at                Estate, Rochester, Minnesota,
  more expensive.”                           97.48, just under the normative                 says, “Thanks to the continued
     Bruce Wettenstein, SIOR,                score of 100 for healthy markets.               growth of the Mayo Clinic, the
  Vidal/Wettenstein, Westport,               Early in this decade’s economic                 office marketplace in Rochester,
  Connecticut, notes, “For the past          cycle, financial industry profits               Minnesota, is stronger than
  two years, properties have been            far outpaced non-financial cor-                 would otherwise be true.”
  selling two to one over the leas-          poration earnings. But during the                  Kevin J. Crowley, SIOR, Iowa
  ing market. You would think                past year, profits for manufactur-              Realty Commercial, Des Moines,
  that due to the increased com-             ers, retailers, shippers, and other             Iowa, observes, “A tightening
  mercial interest rates, the market         basic economic sectors have                     market and rising construction
  would tend to slow down and                actually exceeded gains from                    costs should allow both office
  the leasing pick up. That is not           financial firms. This is good                   and industrial landlords with
  the case—yet. What is keeping              news for the Midwest. The tra-                  second generation space to see
  the industrial real estate market          vails of the auto industry                      the first opportunity of an
  strong is the lack of quality              notwithstanding, Midwest SIORs                  increase in net rental income in
  available product. What we need            pushed their evaluation of the                  years.” And Margery J. Stratton,
  in our market is 20,000 to                 local economy’s contribution to                 SIOR, NAI Ruhl & Ruhl
  50,000 sq. ft. flex properties for         real estate market conditions up                Commercial Co., Davenport,
  sale.”                                     by 0.27 points. Asking rents rose               Iowa, of the Iowa/Illinois Quad
     In Albany, New York,                    and subleasing pressure eased.                  Cities market, remarks, “The
  “Increased demand in rail has              Although the Midwest still has                  general conditions of our market
  revitalized interest in some older,        the most generously available                   have remained steady. We are
  neglected industrial parks that            tenant concessions in the nation,               beginning to see some smaller
  still have active rail service,”           tightening in this area was                     office spaces occupied in the sub-
  according to Richard P.                    marked by a 1.28-point rise in                  urban market. There are very
  Sleasman, SIOR, CB Richard                 score for landlord bargaining                   few large office users considering
  Ellis/Albany. But the upward               power. In Chicago, David Bercu,                 our market. The smaller office
  slope of recovery elsewhere in             SIOR, Colliers Bennett &                        users are new companies coming
  the region is steep, as indicated          Kahnweiler, Rosemont, Illinois,                 to the area to test the market-
  by this comment from a Rhode               says, “Our market is beginning                  place. Our CBD is holding its
  Island SIOR, “The Providence               to experience a rebound, and                    tenants.”
  MSA still maintains industrial             well-located new construction is                   “The St. Louis industrial mar-
  rental rates that are below what           selling at sub-six-percent cap                  ket is experiencing substantial
  any investor would consider a              rates.” There is still a long way               new construction of 500,000 to
  fair return, therefore no new              to go for the Great Lakes and                   1,250,000 sq. ft. distribution
  spec construction occurs, limiting         Plains States, though, as the                   center product catering to the
  rental space to second generation          Midwest had the lowest regional                 consumer non-durable market.
  property.”                                 scores in every one of the 10 ele-              The Metro East, Illinois area,
                                             ments covered by the SIOR                       just across the Mississippi River
professional report                                                                                                       Fall 2006
                                                                                          its regional index, to 129.08.
                                                                                          User market conditions uni-
                                                                                          formly rose in the South, with
                                                                                          more leasing activity, rising
                                                                                          rents, lower vacancy, less sublet
                                                                                          inventory, and tighter concession
 Nathan Anderson   Robert Dikman   Monte L. Froehlich   Charles King   Ronald Jurgenson
                                                                                          conditions prevailing since May.
from St. Louis, is the focus of            Ellis/Paramount, reflects, “The                The local economy is seen as
this development due to                    move from high volume-low skill                making a positive contribution
inexpensive and plentiful indus-           manufacturing to low volume-                   to the real estate market to a
trial land that offers entitlements        high skill manufacturing has                   greater degree than earlier this
such as TIF and tax abatement,”            benefited western Michigan. We                 year. Developers are becoming
summarizes Allen P. Klippel, Jr.,          are seeing strong growth from                  more active, site prices are
SIOR, CB Richard Ellis, St.                our local privately held, entre-               increasing, and investment pric-
Louis, Missouri. “Industrial leas-         preneurial manufacturing com-                  ing is staying ahead of building
ing demand has picked up pace,             panies. The accelerating health                cost escalation. The enormous
largely due to the climb in inter-         and bioscience influences in our               profits of the energy industry are
est rates. Companies seem opti-            market are starting to show up                 boosting many Gulf Coast mar-
mistic, although not nearly as             in the industrial market. Overall,             kets. The effects of the hurri-
‘giddy’ as they were in the late           West Michigan is in a very good                canes of 2004 and 2005 are
’90s,” adds Nathan Anderson,               recovery situation.”
CCIM, SIOR, Kessinger/Hunter                  Ronald J. Jurgenson,
& Co./Cushman & Wakefield                  CCIM, SIOR, Michael
Alliance, Kansas City, Missouri.           Realty Co., Toledo,
   Monte L. Froehlich, CCIM,               Ohio, elaborates, “The
SIOR, U.S. Property, Lincoln,              repercussions of the
Nebraska, covering the Omaha               Daimler Chrysler            Allen Klippel, Jr     Duwane Duke Suwyn  John M.Talhelm
and Lincoln, Nebraska market,              Automotive Plant
comments, “We’ve seen some                 opening has had a significant                 largely mitigated, except in the
good growth in the distribution            impact on the vacancy of indus-               worst of the Katrina-damage
sector recently but the market             trial real estate in the area. A              zone. Several respondents char-
has been a little soft with some           drop in vacancy from 10.6 per-                acterized local commercial prop-
good deals available to tenants,           cent to seven percent in the last             erty market conditions as the
in spite of increased construction         year has reduced the overall                  best in a decade or more and
costs.”                                    square footage by more than                   Robert J. Dikman, ALC, CCIM,
   Structural transition is a domi-        four million square feet. This                CRB, SIOR, The Dikman
nant theme in comments from                surge has caused developers to                Company, Tampa, Florida, says,
the Great Lakes portion of the             look at speculative space, how-               “This is a wonderful time to be
Midwest. “Some of the locally              ever, the cost of new construc-               in the commercial/industrial real
based businesses are growing,              tion and its affect on market cap estate business.”
but most of the growth and sub-            rates, does not allow developers                 While most of the country is
sequent need for industrial space          to compete with existing rates                fulminating about gasoline
is occurring outside of the local          while maintaining the required                prices, there are areas of the Gulf
market,” says Charles C. King,             investment return.”                           Coast where $70+ per barrel oil
SIOR, Grubb & Ellis/Paramount,                                                           prices prompt utter glee.
Grand Rapids, Michigan.                    South Region                                     Houston is booming, as it
   In the same market area,                Propelled by a rise in nine of the does periodically, and it is
Duwane “Duke” Suwyn, CCIM,                 10 survey elements, the South                 responding–as usual–with enthu-
SIOR, also with Grubb &                    enjoyed a gain of 5.73 points in              siasm. John M. Talhelm, SIOR,
Fall 2006                                                                                                      professional report
                                                                                relief as the most meaningful
                                                                                amount of new construction is
                                                                                scheduled to come on line during
                                                                                the latter part of 2007. New
                                                                                inventory will command initial
                                                                                rental rates near $30.00 per sq. ft.”
  William Bradford    Thomas O’Brien       Damon Palermo    Charles Salley
                                                                                  Spirits are high throughout the
  Cushman & Wakefield of Texas,            are added to the inventory.” The     South. A quick tour of regional
  Houston, Texas, has this to say          Houston office market shows          survey responses reveals com-
  about his market, “The airport           strength as well, according to       ments such as the following:
  sub market represents the highest        Damon P. Palermo, SIOR,                 • “The Orlando industrial
  lease rates in the city for industrial   Palermo Real Estate Interests,       market is in the beginning stages
  space followed by the Northwest          The Woodlands, Texas, who            of the largest rental rate spike in
  market. A building boom is               says, “The Woodlands sub mar-        its history with rents expected to
  underway in the Southeast mar-           ket continues to log very impres-    jump as much as 15 to 20 per-
  ket driven by anticipated ware-          sive statistics. The sub market      cent over the next 12 to 18
  house space needs with the               boasts the lowest Class ‘A’ office   months. Our demand is not nec-
  expansion of Houston’s con-              vacancy rates and, conversely,       essarily spiking—our supply of
  tainer terminals. With new               the highest rental rates within      industrial zoned land is dwin-
  space, there is slight shift in          the entire Houston MSA. The          dling.” —William “Bo”
  leverage to the tenant which may         remainder of 2006 appears to         Bradford Jr., CCIM, SIOR, GVA
  increase as more new projects            offer prospective occupants no       Advantis, Orlando, Florida
                                                                                        • “The vacancy rate in
                                                                                     Columbia is at its lowest
                                                                                     level since 1998 and will
                                                                                     probably finish out the year
                                                                                     at a record low vacancy
                                                                                     rate.” —Charles W. Salley,
                                                                                     SIOR, Colliers Keenan,
                                                                                     Columbia, South Carolina
                                                                                        • “For the last two years
                                                                                     we have been advising our
                                                                                     tenant clients with lease
                                                                                     expirations before 2009 to
                                                                                     review their occupancy
                                                                                     needs carefully. For the
                                                                                     next several years, the bal-
                                                                                     ance of power will shift sig-
                                                                                     nificantly in favor of land-
                                                                                     lords. We anticipate rising
                                                                                     rents, and solid demand for
                                                                                     space with little new supply
                                                                                     in the Charlotte Center City
                                                                                     market.” —Thomas F.
                                                                                     O’Brien, SIOR, Trammell
                                                                                     Crow Co., Charlotte,
                                                                                     North Carolina

professional report                                                                                          Fall 2006
                                                                                                            Other SIORs
                                                                                                         ratify this per-
                                                                                                         Branon W.
                                                                                                         Pesnell, CCIM,
                                                                                                         SIOR, NAI
  Ogden Deaton     Bert Duvic III Adam Metcalfe     Branon Pesnell  Lester Osborn       Andrew Stetelman Latter & Blum,
                                                                                                         Baton Rouge,
   • “Demand is outpacing sup-         increasing and NAR is holding
                                                                                  Louisiana, says, “The hurricanes
ply in Charlotte’s industrial mar- its annual convention in New                   of 2005 have had a positive
ket. Industrial sites in northern      Orleans very shortly. The French
                                                                                  effect on the Baton Rouge mar-
Charlotte have recently sold for       Quarter and our hotels were rel-
                                                                                  ket that will likely last for the
$125,000 to $130,000 an acre           atively unaffected and your
                                                                                  long term.” Adam J. Metcalfe,
whereas just a few years ago           favorite restaurants are still
                                                                                  SIOR, Metcalfe & Co., Mobile
prices were $65,000 to $75,000         open. Out-of-state investors who
                                                                                  Alabama, services the coastal
an acre.” —Lester E. Osborn II,        are bottom fishing are trying to
                                                                                  areas of Alabama, Mississippi,
CCIM, SIOR, Piedmont                   enter our market to no avail.
                                                                                  and Northwest Florida, and
Properties of the Carolinas,           Investors wanting to develop
                                                                                  indicates, “The demand for
Charlotte, North Carolina              new product are being greeted
                                                                                  industrial space in these areas,
   • “The Birmingham market            politically and economically with
                                                                                  post Katrina, has increased con-
continues to be steady—buoyed          open arms and big incentives.
                                                                                  siderably. With nearly zero per-
by the automotive industry.            Lenders are ready and willing to
                                                                                  cent vacancy and rising construc-
Currently, development appears         invest in new projects. The
                                                                                  tion and land costs, tenants must
to be in line with demand. There northern end of our market                       be prepared for rental rates never
is a good supply of existing Class (north of Interstate 12) has                   seen in these markets.” And
‘A’ bulk on the market and in the extremely high demand for office Andrew Stetelman, GRI, SIOR,
development pipeline. Hopefully, and industrial development.                      London & Stetelman Commer-
the market will absorb this prod- Presently, in this sub market,                  cial REALTORS®, Hattiesburg,
uct and stay in balance.” —            there is zero availability of office
                                                                                  Mississippi, reports, “We are in
Ogden S. Deaton, SIOR,                 or warehouse product, with only
                                                                                  the ‘Go Zone’ one of the Katrina
Graham & Co., Birmingham,              a minor amount presently under
                                                                                  incentive markets. We were
Alabama.                               construction. The major draw-
                                                                                  pretty busy prior to Katrina and
                                       back to economic recovery in
   Even reports from Hurricane                                                    now the bonus depreciation of
                                       our area is the unavailability of
Katrina-affected areas are                                                        50 percent offered to qualified
                                       or difficulty in obtaining All
upbeat.                                                                           and active investors in the first
                                       Hazard insurance, both commer-
   Bert F. Duvic III, CCIM,                                                       year is putting Hattiesburg, the
                                       cial and residential, south of
SIOR, Max J. Derbes, New                                                          largest city north of New
                                       I-12. Landlords south of I-12 are
Orleans, Louisiana, depicts the                                                   Orleans, and the Gulf Coast on
                                       seeing premiums increase from
New Orleans/South Louisiana                                                       the map.”
                                       300 to 500 percent for wind and
area this way: “Regardless of          hail and 200 to 300 percent for
what you read or see on the            fire coverage. Flood and liability
                                                                                  West Region
news, New Orleans is rebound-                                                     Among the regions, the West
                                       insurance costs are relatively
ing, slowly but surely, to a great                                                exhibited the greatest Index
                                       unchanged in areas that did not
southern city. Oil and gas explo- flood. The New Orleans MSA is                   decline, falling 4.39 points but
ration as well as the related serv- in full recovery, many areas are              still posting the highest score of
ice and construction companies                                                    any area of the country. The
                                       in need of new development and
are booming. Convention and                                                       combination of rapidly increas-
                                       in need of industrial, office, and
tourism business is steadily                                                      ing construction costs and rising
                                       mixed-use parks.”

Fall 2006                                                                                                 professional report
                                                                 California,    SIORs from markets with
                                                                 says, “The     tremendous strength.
                                                                 market is        —“The Salt Lake office
                                                                 getting bet-   market is very strong with CBD
                                                                 ter for ten-   Class ‘A’ vacancy at mid-year at
                                                                 ants.” The     a mere four percent and still
     James Brown     Gregory Gunn  Thomas Knox    Stan Mullin
                                                                 West still     declining.” —Gregory M. Gunn,
                                                                 posts the      SIOR, Coldwell Banker
  interest rates precipitated an
                                        top scores of all regions in eight      Commercial, Salt Lake City,
  11.48-point dip in the invest-
                                        of the 10 subjects covered in the       Utah.
  ment pricing component of the
                                        SIOR survey. At a regional index
  index. SIOR’s respondents also                                                   —“Tucson’s office market
                                        of 131.68, this region (combin-
  pulled back in their estimate of                                              continues to experience an
                                        ing the Pacific and Mountain
  the contribution of the national                                              unprecedented level of develop-
                                        States) edges out the South as the
  economy to the West’s market                                                  ment of ‘Built for Sale’ office
                                        leading area for industrial and
  vitality, with that score dropping                                            product. Niche market areas are
                                        office real estate in the summer of
  1.18 points since May. Site                                                   meeting demand in the expand-
  acquisition prices and asking                                                 ing metro footprint. Prices for
                                            Undoubtedly, many survey
  rents had smaller reductions in                                               cold shell have risen to $180-$195
                                        respondents express gusto when
  their scores, but are still very                                              per sq. ft., resulting in finished
                                        evaluating current and antici-
  robust. Stan Mullin, CCIM,                                                    office space in the $240-$255
                                        pated market conditions. Here is
  CRE, FRICS, SIOR, Grubb &                                                     per sq. ft. range. Land for such
                                        a sampling of viewpoints from
  Ellis Co., Newport Beach,                                                         product is valued at $10-$12
                                                                                    per sq. ft. raw cost, and is
                                                                                    very difficult to acquire.”
                                                                                    —Thomas S. Knox, SIOR,
                                                                                    PICOR Commercial Real
                                                                                    Estate Services, Tucson,
                                                                                     But “curb your enthusi-
                                                                                   asm” comments are turning
                                                                                   up with increasing frequency.
                                                                                      —“Honolulu is seeing
                                                                                   steady occupancy growth.
                                                                                   With no new inventory in
                                                                                   sight and rental rates well
                                                                                   below that necessary to jus-
                                                                                   tify new product, rental rates
                                                                                   are increasing quickly. Poten-
                                                                                   tial storm clouds on the hori-
                                                                                   zon are an extremely tight
                                                                                   labor market and economic
                                                                                   slowdown on the West Coast
                                                                                   which is our major visitor
                                                                                   market.” —James M. Brown,
                                                                                   CCIM, SIOR, Hawaii
                                                                                   Commercial Real Estate,
                                                                                   Honolulu, Hawaii.
professional report                                                                                       Fall 2006
                                                                         absorption of available distribu-
                                                                         tion, manufacturing, and flex
                                                                         space. The local economy has
                                                                         continued to strengthen, driving
                                                                         increased occupancy demand for
                                                                         industrial space.” —Jeffrey R.
Jeffrey Brooks   Michael LaRocque      Lance Ross      Luke Staubitz     Brooks, CCIM, SIOR, GVA
                                                                         Kidder Mathews, Portland,
   —“The Los Angeles North                                               Oregon.
market appears to be approach-               . . .the SIOR
                                                                            There may be those who feel
ing a wait and see position.
                                                                         that J.P. Morgan’s bon mot, cited
Although sales activity is still         Commercial Real                 at the beginning of this article, is
strong, prices appear to be level-
                                                                         anything but helpful. Surely, the
ing out. Lease activity under             Estate Index is                young investor who was looking
20,000 sq. ft. is still strong but
                                                                         for a “hot tip” probably walked
larger lease opportunities are
                                         demonstrating its               away with a disappointed shake
slowing down.” —Michael J.
                                                                         of the head. He might even have
LaRocque, SIOR, GVA Daum
Worldwide Real Estate Solutions,      sensitivity to changes             been tempted to fire back with a
                                                                         quotation from George Bernard
Woodland Hills, California.
                                      across the country. . .            Shaw, “If all the economists in
   —“The Los Angeles industrial                                          the world were laid end-to-end,
market is in uncharted territory.                                        they would not reach a conclu-
                                     seen in 28 years. However the
Available land sites for develop-                                        sion.” But, Morgan pointed us to
                                     current rise in cost and rent are
ment have become extremely                                               a very basic truth—that cycles
                                     not sustainable and there will be
scarce across the basin, vacancy                                         are a function of all free mar-
                                     a correction, probably in the
rates are at historic lows, and                                          kets. And there may be no indus-
                                     summer of 2007.” —Lance C.
asking sale prices have reached                                          try where this is more the case
                                     Ross, SIOR, Ross Property
record heights. Leasing activity                                         than in real estate. Therefore, I
                                     Advisors, Scottsdale, Arizona.
on the demand side appears to                                            think, it is very encouraging to
be decreasing, although with low     “The metropolitan Portland/-        see that the SIOR Commercial
inventory, it is not yet clear if    Vancouver industrial real estate    Real Estate Index, in its first year
this is a result of companies’       market had continued to post        of publication, is already demon-
expansion needs slowing or a         impressive market statistics dur-   strating its sensitivity to changes
lack of choices. The impact of       ing 2006 and is on pace to set an   as they occur across the country
higher interest rates on SBA or      all-time high in terms of net       and over the course of time.
high leverage owner-occupi-
er buyers has not yet been
fully realized. Asking cap
rates seemingly and tem-
porarily defy the increasing
cost of capital. The balance
of the year is going to be
very interesting.” —Luke
Staubitz, SIOR, The Klabin
Company, Los Angeles,
  —“This is the most active
industrial market that I have
Fall 2006                                                                                      professional report

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