Commercial real estate companies see fundamentals improve, tenants optimistic

Office space is poised to be the next all-star performing commercial real estate segment.

With some commercial real estate markets performing well while others are still recovering, the office sector's performance is expected to remain steady. 

The CoStar Group recently analyzed data from their Commercial Repeat Sale Index and found uneven liquidity among commercial assets, especially when it came to secondary markets and sub-investment grade assets, despite improving pricing and overall transaction activity.

"For some time now, there's been a significant imbalance between the amount of capital chasing real estate deals and the available supply of reasonable, institutional-quality deals," said Michael Zietsman, managing director of Jones Lang LaSalle. "If there were more supply, there would be much larger transaction volume. The primary markets and product types have fully recovered, but investors want high-quality real estate. That's been our biggest challenge."

However, some barometers of commercial real estate health are showing significant signs of recovery. For instance, the disparity between initial and final price sales prices has diminished by 2.2 percent from a year ago, and the average time a property sits on the market decreased by 5.1 percent in April. The CCRSI also indicated less properties withdrawn from the market from frustrated sellers, not to mention the 25 percent increase in repeat sales activity.

The office sector lights up
According to the latest Building Owners and Managers Association survey, more than 75 percent of office tenants claimed they had plans to either retain current office footprints and staffing levels or increase space requirements. In the 1999 BOMA Global Office Survey, not even half of the respondents reported utilizing buildings equipped with "intelligent building," amenities such as high-speed internet and HVAC systems. Phil Mobley, vice president of Kingsley, said three of the five most important factors impacting office tenant satisfaction were related to service oriented amenities.

"We feel the corner has been turned and the economy is moving along, albeit slowly, but in the right direction," Michael Prabhu, managing director of property management at Jones Lang LaSalle, told CoStar. "Tenants in our buildings are feeling more comfortable and confident, which is driving some of their space utilization decision making. It's a more optimistic environment."

The National Real Estate Investor reported separate data from CoStar that illustrated improving fundamentals across the board, with the warehouse, retail and office sectors driving the largest gains in investment grade. While the multifamily/ apartment sector has been a key player in the recovery, the improving numbers indicate a wider amount of activity.

For example, CoStar's composite index gained 6 percent during the 12 months leading up to April, while the Moody's/RCA Commercial Property Price Index climbed 1.7 percent during the past 3 months. For the year, the CPPI was up by 6.5 percent. The National Council of Real Estate Investment Fiduciaries Index was also up 10.5 percent for the year, a tool that is used by real estate investors to assess both appreciation and income.

Given the economic optimism shared among the majority of office tenants, commercial property management companies have reason to believe that the office sector will bounce back in the near future.

"Investors are looking at suburban office more. A year or so ago, you couldn't get them to show up," says Havsy. "Everything else has gone up - maybe it's suburban office's time."

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