Business Management Executive Q&A
Nov 1, 2007
As the fallout from the subprime crisis pans out, many U.S. markets have seen a direct impact on office space, especially as residential-related businesses, such as mortgage companies, pull back space or close shop. CPN Associate Editor Amanda Marsh spoke with Grubb & Ellis Co. senior vice president Bob Bach about the immediate effects, historical perspectives and the long-term outlook of the residential market's influence on the office sector.
CPN: What U.S. office markets have been most impacted by the residential volatility?
Bach: On the leasing side, I would say Orange County, Calif., by far and away, but also the Inland Empire, Fresno, Phoenix, Las Vegas, South Florida and a handful of submarkets in larger metros, such as the Schaumburg
area outside Chicago, which has had a number of mortgage and real estate-related tenants. On the investment side, I would say the pain is equally distributed so far, with deals falling apart or getting re-traded without too much regard to location. But I look for that to change going forward, with secondary and tertiary markets feeling the impact of rising cap rates more than primary markets, where supply constraints, barriers to entry and an institutional focus offer some support for cap rates and prices.
CPN: Was this volatility enough to derail overall recovery and expansion of the office market?
Bach: Derail, no, or not yet; slow the momentum, yes. The U.S. office vacancy rate ended Q3 2007 unchanged at 13 percent, ending a string of 13 consecutive quarterly declines. Sublease (space) rose from 73 million to 77 million square feet, the first increase in five years. But asking rental rates continue to rise briskly in a number of markets including Austin, Seattle, Houston, Los Angeles, the Bay Area, Boston, New York City and Washington, D.C.
CPN: How will the residential market’s influence on the office market impact rental rates, vacancy rates and absorption?
Bach: Office vacancy rates are likely to fluctuate over the next few quarters with little momentum, either up or down. I look for absorption and rent growth to decelerate moderately over the next few quarters but remain positive. Incidentally, I don’t think it’s the residential market per se that is causing this, but the broader credit squeeze that has raised concern over a recession. The turmoil started in the residential subprime market and infected other sectors of the financial world that bought securities backed in whole or part by sub-prime loans, including the major money center banks and stretching across the globe.
CPN: How does today’s housing market and its effect on employment rates and the office market compare to 1991’s downturn?
Bach: Real estate fundamentals are in much better shape now. There is little or no overbuilding. For example, the vacancy rate in Austin back then approached 40 percent. Today, it’s 11 percent. Also, there was an outright recession in 1991, and the jury is still out today on whether we will see a recession beginning sometime in the next few months.
CPN: And how does the current state of the office market compare to the post-tech bubble office market?
Bach: The vacancy rate is higher now than it was at the height of the tech boom, 13 percent now versus 8.5 percent in Q3 2000. (In the third quarter), the average asking rental rate for Class A space eclipsed its prior peak in Q1 2001. Post-tech-bubble, the vacancy rate hit a peak of 17.9 percent—three separate quarters, the last one being Q1 2004—and the average asking rental rate for Class A space fell back to $27.63 in Q3 2004. So the office market is in much better shape now than it was after the tech bubble burst.
CPN: What is your overall perspective and/or predictions regarding the U.S. office market going in to 2008?
Bach: Look for a slow first half of the year as tenants reassess their expansion plans and approach leasing decisions with more caution. Momentum is likely to pick up in the second half. This assumes we escape a recession, which—if we don’t—would bring negative absorption, softening rents and the usual accoutrements that nobody likes, except perhaps bankruptcy attorneys.
As the fallout from the subprime crisis pans out, many U.S. markets have seen a direct impact on office space, especially as residential-related businesses, such as mortgage companies, pull back space or close shop. CPN Associate Editor Amanda Marsh spoke with Grubb & Ellis Co. senior vice president Bob Bach about the immediate effects, historical perspectives and the long-term outlook of the residential market's influence on the office sector.
CPN: What U.S. office markets have been most impacted by the residential volatility?
Bach: On the leasing side, I would say Orange County, Calif., by far and away, but also the Inland Empire, Fresno, Phoenix, Las Vegas, South Florida and a handful of submarkets in larger metros, such as the Schaumburg
area outside Chicago, which has had a number of mortgage and real estate-related tenants. On the investment side, I would say the pain is equally distributed so far, with deals falling apart or getting re-traded without too much regard to location. But I look for that to change going forward, with secondary and tertiary markets feeling the impact of rising cap rates more than primary markets, where supply constraints, barriers to entry and an institutional focus offer some support for cap rates and prices.
CPN: Was this volatility enough to derail overall recovery and expansion of the office market?
Bach: Derail, no, or not yet; slow the momentum, yes. The U.S. office vacancy rate ended Q3 2007 unchanged at 13 percent, ending a string of 13 consecutive quarterly declines. Sublease (space) rose from 73 million to 77 million square feet, the first increase in five years. But asking rental rates continue to rise briskly in a number of markets including Austin, Seattle, Houston, Los Angeles, the Bay Area, Boston, New York City and Washington, D.C.
CPN: How will the residential market’s influence on the office market impact rental rates, vacancy rates and absorption?
Bach: Office vacancy rates are likely to fluctuate over the next few quarters with little momentum, either up or down. I look for absorption and rent growth to decelerate moderately over the next few quarters but remain positive. Incidentally, I don’t think it’s the residential market per se that is causing this, but the broader credit squeeze that has raised concern over a recession. The turmoil started in the residential subprime market and infected other sectors of the financial world that bought securities backed in whole or part by sub-prime loans, including the major money center banks and stretching across the globe.
CPN: How does today’s housing market and its effect on employment rates and the office market compare to 1991’s downturn?
Bach: Real estate fundamentals are in much better shape now. There is little or no overbuilding. For example, the vacancy rate in Austin back then approached 40 percent. Today, it’s 11 percent. Also, there was an outright recession in 1991, and the jury is still out today on whether we will see a recession beginning sometime in the next few months.
CPN: And how does the current state of the office market compare to the post-tech bubble office market?
Bach: The vacancy rate is higher now than it was at the height of the tech boom, 13 percent now versus 8.5 percent in Q3 2000. (In the third quarter), the average asking rental rate for Class A space eclipsed its prior peak in Q1 2001. Post-tech-bubble, the vacancy rate hit a peak of 17.9 percent—three separate quarters, the last one being Q1 2004—and the average asking rental rate for Class A space fell back to $27.63 in Q3 2004. So the office market is in much better shape now than it was after the tech bubble burst.
CPN: What is your overall perspective and/or predictions regarding the U.S. office market going in to 2008?
Bach: Look for a slow first half of the year as tenants reassess their expansion plans and approach leasing decisions with more caution. Momentum is likely to pick up in the second half. This assumes we escape a recession, which—if we don’t—would bring negative absorption, softening rents and the usual accoutrements that nobody likes, except perhaps bankruptcy attorneys.
Recent Executive Q&A Headlines
July 15, 2008
Subscribe to this blog's feed
