What really happening on the street? What do the people who actually do commercial real estate business see think and feel in their markets? Myself along with Mike Manning from Loopnet will take on several interesting and relevant topics in the future. I have kind of named them Marketcasts.Here is the first.Click here for the full Marketcast audio. Below is the text version.
MIKE MANNING: What we’re seeing overall in the LoopNet marketplace in the industrial lease sector is price declines more or less across the board, but with some differences across the market. So we’re seeing our sharpest price declines in Phoenix, San Antonio, Orlando and Miami which are down 8-9% versus the prior year November in terms of average asking price per square foot, whereas on the other end of the spectrum Chicago is holding flat, is actually up slightly, and Philadelphia is close to flat along with Atlanta and Houston. So I will be curious to hear about the differences in perspective from the brokers on the call as to what’s going on in their markets and what’s accounting for the different levels of pricing pressure that they are seeing.
We’re also seeing differences in the change of supply and demand in the market across different geographies, with Houston showing up as having a fairly sharp decline in supply although an increase in demand. However, I think that’s different from John’s experience personally, and so I’m going to be interested in hearing about that. New York is also showing some declines in terms of demand but the supply is up, whereas at the other end of the spectrum Detroit, Orlando and Philadelphia are all seeing significant increases in demand which we’re measuring by search activity on the site.
Don Rudolph, Coldwell Banker Commercial
DUKE LONG: All right, well Don in Orlando, it seems like Orlando is kind of leaving everyone else in the dust a little bit on the demand side. It’s showing that it’s up 40% on LoopNet versus last quarter. Is this data telling a true story in the Orlando market? What are you seeing?
DON RUDOLPH: Well, not an increase of 40%. That’s probably not completely accurate, but there is a lot of transitional leasing taking place right now. There’s a lot of companies that are downsizing and taking smaller spaces, and there’s also a lot of opportunity for landlords in this existing market to cut rents and keep tenants in place. So I don’t doubt that there’s a lot more search activity going on because there is a lot of space out there.
We do have one issue, though. Down by the airport, the Lake Nona and Medical City area has increased demand in the Orlando market. So in that particular submarket there is a dramatic increase in demand and that is one place where the lease rates have stabilized and have not decreased.
Adam Roth, NAI Hiffman
DUKE LONG: And now to Adam in Chicago. Give us a realistic street view of what’s really going on with pricing in Chicago. You’re the one market that’s showing an increase in asking prices which I find fascinating while everyone else is dropping them. Do you have any ideas or is there a special secret thing that’s going on in that market?
ADAM ROTH: There’s really no secret to Chicago. As far as the pricing showing somewhat of an uptick, I believe that to be a little bit of an anomaly. There is and there will continue to be rental pressure, but the change that I’ve seen or we’ve seen in the Chicago market as recently as the last six weeks, just the basic conversations we’re having with corporations, much more strategic-based, much more initiative-based, whereas virtually most of 2009 and the first three quarters of 2010 a lot of tire kicking, very few transactions being done.
Just in the last five to six weeks there’s been a couple large transactions announced in Chicago, and a lot more true activity and deals actually getting signed. And the activity has been really on the larger side, the over 200,000 square feet is where we’ve seen deals getting actually done and inked in the last four weeks.
Bob Pliska, Sperry Van Ness
DUKE LONG: Now let’s go to Bob in Detroit. You know, Bob, I was just in Detroit maybe two or three months ago. There’s always the perception that Detroit is dominated somewhat by the car business and that drives that market. Is that true or not, and how is that affecting industrial market? What are the real market factors from your perspective?
BOB PLISKA: I think Detroit does have an impact. The good news, Detroit has the auto industry; the bad news, Detroit has the auto industry, in the sense that it is impacted by the auto industry. As you can see in the last six months or so, all the major players like GM, Ford and Chrysler have been making profits. GM just went through a major IPO and Ford is making tremendous increases in marketshare and income versus in 2009 you had kind of a tremendous negative situation. It’s amazing how the auto industry has basically completely turned around itself. And this has an impact not only on the amount of industrial space that is required, but also pushes down on the suppliers that make the parts and bring the stuff to the OEM’s, the original equipment manufacturers.
John Ferruzzo, NAI
Principal-Industrial Division Leader
DUKE LONG: Okay, John, let’s talk about the Houston market. We’re showing that the market is very, very flat overall, and possibly down by 20%. And as Mike mentioned, you’re not seeing that personally, but what is the story? Is this true and what are you seeing on the street right now in Houston?
JOHN FERRUZZO: We’re definitely seeing the demand pick up, and it’s really been the last I’d say two to three months. 20% off in our mind, it’s I think when the fourth quarter numbers come out, the end of fourth quarter you’re going to definitely see vacancy drop, absorption increase and we’re down to—at least the numbers that we’re about to look at that we’re accumulating—where the vacancy rate could be below 6% citywide here coming up. And you’re starting to see large transactions occur and we’re very energy driven here, and of course we have the port as well.
But we noticed a definitely uptick in activity once the drilling ban was lifted by the Obama administration. Now granted it’s definitely difficult to get permits right now and people are still going through that process, but we’ve definitely seen that as really a trigger point for things to occur. And I can tell you, we’re about as busy—and this is not just my shop but a number of the other broker shops around town—we’re probably busier now than we’ve been since probably 2007.
And we’re cautiously optimistic, but I think moving ahead everybody expects things to really increase going into the next year, and that’s activity as well as deals getting done. Along the year there have been a number of tire kickers and people dipping their toe in the water, but there are a number of transactions occurring and there’s a number of them that have been larger transactions that have been more than short-term deals. We’ve seen a number of seven to ten year leases occur where we really hadn’t seen that happen probably the last year.
MIKE MANNING: John, what are you seeing happen to asking rents?
JOHN FERRUZZO: It really depends on where you are. There’s still a large market in the southeast part of I guess our market which is the LaPorte-Deer Park here. There’s a lot of vacancies still sitting there, and some of those landlords are getting aggressive and that’s driving the price down some. The flex market is extremely flat and there’s probably a 12% vacancy rate for the flex buildings.
So taking that out of the equation, the flex building as well as that one submarket, the rates are coming down, but we’re really starting to see ask price upticking a little bit and we expect that to increase again next year. So the 20% drop or the 2-3% drop that I saw on the ground here, and taking out a couple pieces of the market I really think that number is skewed a little bit and we may be closer to Chicago where they’re going up a little bit.
NEW JERSEY MARKET
Paul Waters, NAI Global
Executive Vice President-Brokerage, The Americas
DUKE LONG: Now Paul, let’s talk about New York a little bit. The big word is that New York has not seen any decline in demand or activity or deals, just because it’s wonderful New York, and I was there this year. Is this just good PR from the brokers, or does New York really have this kind of market, New York-New Jersey area. What are you seeing out there?
PAUL WATERS: Oh, I think it’s largely PR, Duke. Obviously New Jersey, one of the largest, probably fifth largest or one of the five largest industrial markets in the country if not North America, we’re way off. We’re way off. Let me set the table by giving some metrics here. We had a historic year in 2004 of 26 million square feet absorbed. And then in ’08 when things fell apart in the industrial or the commercial real estate market, we were down at 12, so less than half. And then we saw an unexpected increase in 2009 at 16 million. So that’s a 4 million square foot increase.
So what’s going to happen for 2010, we’re going to meet that number from ’09, so the brokers are saying hey, ’09 and ’10 were pretty good years, although they’re way off. So I think in terms of perception they’re seeing that it’s not a bad year. Activity is way off from the mid-2000s.
DUKE LONG: So it’s again a little bit of good PR. Are you seeing any just price appreciation or are there still people just really going after deals? Or do you see it coming around where the owners are actually getting maybe a little bit better structured deals on their side? What do you think there?
PAUL WATERS: Well, that’s a good question. Through December 15th renewal activity and new leasing is even, about 48 and 52, so that’s interesting.
DUKE LONG: That’s pretty good.
PAUL WATERS: Yes. The New Jersey market is Exit 8, which is north-central Jersey. That’s where all the big boxes, that’s where Pearl Lodges has one of their largest North American footprints. Exit 8 is the market in New Jersey and there’s a lot of activity there, obviously, in a blend and extend, etc. The asking prices are down—I mean, excuse me, the take-down prices are down. Asking prices are 650 in that area. They’re probably at 550 now and deals are being done at 495, 500, 515. So activity is down, pricing is down and we’ll want to meet, match absorption from last year which I think is probably a good sign.
LOS ANGELES MARKET
Allen Buchanan, Lee & Associates
Principal Specializing in Investment and Industrial Brokerage
DUKE LONG: Sounds decent at least. Now let’s talk about Los Angeles and the Orange County area, Allen, and just give us a general breakdown, somewhat like what Paul did about your industrial pricing and some demand or the lack of demand, and kind of what you see in maybe three, six, nine months out. What are you seeing out there?
ALLEN BUCHANAN: Yes, appreciate it. And I’d also like to say thank you for Duke for setting this up. This is social media marketing at its best and I really am flattered to be a part of this. I think that forums like this are incredibly helpful and in the past it required us to all get on an airplane and go to some sunny place to have an SIOR conference or something of that nature, and now these are happening real-time, and I just think it’s terrific.
My office in located in the city of Anaheim and you all know that based on Disneyland and the Anaheim Angels and the Ducks, and my office literally is a three-wood from where the Ducks play. We’ve seen a tremendous amount of activity probably for the past 16 months. People always ask, hey, how’s your business and I say well, believe it or not, we’ve been busy for about 16 months, and they kind of raise the eyebrows and they can’t believe it. Now a lot of that activity has been driven by both London extend deals as well as a gentleman that might want to double his space and actually lower his rent. We’re seeing a lot of that activity as well.
But I want to just give you a quick statistic which I think is a good microeconomic example of what we’re seeing within the Basin. And by the way, the Basin of Southern California includes about a billion square feet of space. But I want to talk about the Anaheim market which is only about 100 million square feet industrially. This time last year if you drew a line to the west and went to the east, north, south, and that’s probably about a five square mile area, there were 20 buildings greater than 50,000 square feet industrially that were available. Today as we sit there are zero. So we have absorbed 20 buildings north of 50,000 square feet, both on a sale and on a lease basis.
So in terms of what we see for the next three to six months, candidly it’s in my opinion one of the toughest times in the cycle. I’ve been doing this since 1984, so I saw the early ’90s downturn. But the next section in the cycle is where all the users in the marketplace remember the bloody deals that happened that their neighbor or that their cocktail buddies experienced, and now they want to go out and find the same deal. But unfortunately those deals are not there anymore. We’re going to be able to bluff the landlords and bluff the owners for about three more months, and then all of a sudden they’re going to realize that the alternatives in the marketplace are not as plentiful as they were a year ago.
So we’re going to go into this whole I-don’t-believe-the-market-is-recovering and landlords saying yes, in fact it has. So we’re going to go into this whole period of some dysfunction which unfortunately as brokers, we rely on movement either up or down, and I’m afraid there’s going to be some stagnation based on some limited amount of supply and as a result the demand that’s there is not going to be able to find a home. So once we get through that and we start getting some rent migration, the whole thing starts all over again hopefully.
MIKE MANNING: Okay. I have just one final question to wrap up from anyone who feels like answering it. What do you see as the outlook as Duke asked a moment ago over the next three, six or nine months for industrial and how do you see that as comparing to the other lease property type categories in the market?
ALLEN BUCHANAN: Well, if I can jump in, this is Allen from Orange County. As I just mentioned I think we’re moving into that really difficult part of the cycle industrially. What we’re finding on an office perspective with the office brokers in my office and within my company is the office space in Orange County is probably nine months behind the industrial. So our office guys are now starting to see some increased velocity like the industrial people saw a year ago. As we all know, office absorption is largely driven by employment. We’re starting to get some rumors of employers, large employers in Southern California hiring. There have been some high-rise office buildings that have traded at very, very rock bottom pricing and as a part of the consequence of that an office user can now go out in the marketplace and make a deal maybe 40% below where he was able to achieve a deal even two and a half years ago.
So that’s my outlook. Retail is still getting crushed. Quite candidly we’ve had a, Southern California is largely driven by its retail population. We’re a community of shoppers. And that market is still experiencing some difficulty and probably will trail even the office absorption by another nine months.
So in a nutshell, industrial has rebounded. Office probably in the next six to nine months will rebound, and then I would expect to see retail rebound probably 18 months from now.
MIKE MANNING: Okay, anybody else care to take a crack at that for their market? Adam in Chicago or Paul?
ADAM ROTH: This is Adam in Chicago. I view industrial really as coming out of the worst and a lot of similar comments to the earlier folks. We’re definitely trending in the right direction. I think a big part of it and this comes from a lot of the previous comments as well, is that a lot of corporations, I think there’s an acceptance that we’ve hit bottom and that we’re coming out of it. And now is the opportunity for them to still try to take advantage of some of the vacancy out there before pricing—pricing is going to go up more so, and the lack of new construction, that’s still probably 24 months away.
A lot of people are wanting to reinvigorate the blend and extend and the expansion opportunities now, which again has changed just in the last probably two months, which has been a pleasant surprise. I would agree that retail still has a way to go, and we are seeing increased activity from our office people in Chicago, which is a very encouraging factor to see.
PAUL WATERS: Mike and Duke, this is Paul on New Jersey. I see little or no change. Port Elizabeth, the biggest port here on the East Coast, containers, TEU’s are off by 40%, obviously because retail is down. And I agree with earlier comments, retail is very sluggish still. And I would say industrial use largely tied to success in retail sales with your distribution centers, your logistics, your light manufacturing. And until that picks up I see no change. I see very little change in absorptions for 2011 and I see very little change in the pricing schemes for 2011.
Well,there is the first one and I am looking forward to many many more. Have a topic that you would like to suggest?Do you have an opinion or comment? Please do!