HIGHLIGHTS NORTH AMERICA WWW.COLLIERS.COM Q1 2011 | OFFICE ROSS J. MOORE Chief Economist | USA The U.S. office market began the year on a more muted note with only a modest increase in occupied space and little change in vacancy. Rents continued to languish, but for the first time in three years both downtown and suburban rents managed to eke out small gains. With the economy not yet firing on all cylinders and total employment showing only lackluster growth, the outlook for the office space market is far from certain. Higher energy costs are starting to impact business decisions and, as a result, demand for office space. By comparison, Canadian markets enjoyed a reasonably good quarter on the back of robust economic growth and a healthy labor market. Both U.S. and Canadian econo- mies are expected to make gains in 2011, but the sudden surge in energy prices is a fairly stiff headwind that is likely to put a damper on corporate expansion and add to inflation concerns. First-quarter data confirms our view that the U.S. office market recovery will be uneven in nature and fairly volatile. Manhattan, Washington, San Francisco and Boston remain the clear leaders in terms of fundamentals; yet Dallas, Denver, Houston, Northern New Jersey, Philadelphia, Raleigh, San Diego, San Jose, Seattle and West Los Angeles all showing encouraging signs. Also somewhat positive is the thirteen-month-long gain in private-sector employment. Furthermore, office-using employment was reasonably strong during the January-March period, with professional and businesses employment in particular up 3.2% year-over-year (March). Widespread increases in rents are unlikely to occur in 2011 U.S. office market took a breather in Q1, but all signs suggest the recovery begun last year will only accelerate in the coming quarters. MARKET INDICATORS Relative to prior period U.S. OFFICE MARKET SUMMARY STATISTICS, Q1 2011 U.S. Office Market Begins the Year on a Soft Note Q1 2011 Q2 2011* VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE *Projected U.S. OFFICE MARKET Q1 2009 – Q1 2011 Million Square Feet Vacancy (%) -35 -25 -15 -5 5 15 25 35 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Absorption Completions Vacancy 2009 2010 2011 13.8 14.0 14.2 14.4 14.6 14.8 15.0 15.2 15.4 15.6 15.8 Vacancy Rate: 15.46% Change from Q4 2010: –0.01 Absorption: 8.1 Million Square Feet New Construction: 7.5 Million Square Feet Under Construction: 25.7 Million Square Feet Asking Rents Per Square Foot (Change from Q4 2010): Downtown Class A: $39.55 (0.7%) Suburban Class A: $26.20 (0.6%) continued on page 6
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HIGHLIGHTSNORTH AMERICA
WWW.COLLIERS.COM
Q1 2011 | OFFICE
ROSS J. MOORE Chief Economist | USA
The U.S. office market began the year on a more muted note with only a modest increase in occupied space and little change in vacancy. Rents continued to languish, but for the first time in three years both downtown and suburban rents managed to eke out small gains. With the economy not yet firing on all cylinders and total employment showing only lackluster growth, the outlook for the office space market is far from certain. Higher energy costs are starting to impact business decisions and, as a result, demand for office space. By comparison, Canadian markets enjoyed a reasonably good quarter on the back of robust economic growth and a healthy labor market. Both U.S. and Canadian econo-mies are expected to make gains in 2011, but the sudden surge in energy prices is a fairly stiff headwind that is likely to put a damper on corporate expansion and add to inflation concerns.
First-quarter data confirms our view that the U.S. office market recovery will be uneven in nature and fairly volatile. Manhattan, Washington, San Francisco and Boston remain the clear leaders in terms of fundamentals; yet Dallas, Denver, Houston, Northern New Jersey, Philadelphia, Raleigh, San Diego, San Jose, Seattle and West Los Angeles all showing encouraging signs. Also somewhat positive is the thirteen-month-long gain in private-sector employment. Furthermore, office-using employment was reasonably strong during the January-March period, with professional and businesses employment in particular up 3.2% year-over-year (March). Widespread increases in rents are unlikely to occur in 2011
U.S. office market took a breather in Q1, but all signs suggest the recovery begun last year will only accelerate in the coming quarters.
MARKET INDICATORSRelative to prior period
U.S. OFFICE MARKETSUMMARY STATISTICS, Q1 2011
U.S. Office Market Begins the Year on a Soft Note
Q1 2011
Q2 2011*
VACANCY
NET ABSORPTION
CONSTRUCTION
RENTAL RATE
*Projected
U.S. OFFICE MARKET Q1 2009 – Q1 2011
Mill
ion
Squa
reFe
et
Vaca
ncy
(%)
-35
-25
-15
-5
5
15
25
35
Q1Q4Q3Q2Q1Q4Q3Q2Q1
Absorption Completions Vacancy2009 2010 2011
13.814.014.214.414.614.815.015.215.415.615.8
Vacancy Rate: 15.46% Change from Q4 2010: –0.01
Absorption: 8.1 Million Square Feet
New Construction: 7.5 Million Square Feet
Under Construction: 25.7 Million Square Feet
Asking Rents Per Square Foot (Change from Q4 2010): Downtown Class A: $39.55 (0.7%) Suburban Class A: $26.20 (0.6%)
continued on page 6
P. 2 | COLLIERS INTERNATIONAL
HIGHLIGHTS | Q1 2011 | OFFICE | NORTH AMERICA
UNITED STATES | DOWNTOWN OFFICE | ALL INVENTORY
MARKET
EXISTING INVENTORY (SF)
MAR. 31, 2011
NEW SUPPLY Q1 2011
(SF)
UNDER CONSTRUCTION
(SF)
VACANCY RATE (%)
DEC. 31, 2010
VACANCY RATE (%)
MAR. 31, 2011
ABSORPTION Q1 2011
(SF)
NORTHEAST
Baltimore, MD 21,677,000 0 0 16.6 15.6 143,000
Boston, MA 60,163,000 0 760,000 16.6 16.6 (35,000)
Hartford, CT 9,626,000 0 180,000 22.9 22.8 9,000
New York, NY – Downtown Manhattan 109,357,000 0 4,707,000 14.2 14.1 165,000
New York, NY – Midtown Manhattan 228,627,000 0 1,876,000 12.3 12.3 (100,000)
New York, NY – Midtown S. Manhattan 167,392,000 0 0 9.6 9.4 197,000
Sacramento, CA 8,912,000 9.4 9.5 (8,000) 32.20 -1.8 -5.7
San Diego County, CA 7,254,000 16.3 18.3 (85,000) 28.70 0.0 -5.5
San Francisco, CA 52,333,000 15.2 14.5 363,000 36.00 0.0 9.9
San Jose/Silicon Valley, CA 3,365,000 27.9 31.2 (22,000) 32.40 -5.6 -11.2
Seattle/Puget Sound, WA 32,289,000 20.9 18.9 468,000 29.10 -4.5 9.6
Stockton/San Joaquin County, CA 2,774,000 27.6 28.0 (11,000) 21.60 2.3 0.0
WEST TOTAL/AVERAGE 191,065,000 15.60 15.19 823,000 31.47
U.S. TOTAL/AVERAGE 972,505,000 14.98 14.80 3,720,000 39.60 0.68 3.71
28.10 -0.20 -0.30
weighted
equal
P. 6 | COLLIERS INTERNATIONAL
HIGHLIGHTS | Q1 2011 | OFFICE | NORTH AMERICA
and any boost is likely to be foreshadowed by a reduction in inducements which have not yet materialized beyond a handful of markets.
U.S. office vacancy rate holds steady. The U.S. national office vacancy rate barely budged during the first quarter, shifting just one basis point higher (100 basis points equals one percent). Office vacancies finished the quarter at 15.46 percent but are still on track to finish the year below 15.00 percent. During the first quarter, downtown vacancies increased 7 basis points to register 14.19 percent. Suburban vacancy rates nudged lower, falling 3 basis points to 16.07 percent. Over the past 12 months, the U.S. national office vacancy rate has fallen 21 basis points. The flight to quality was particularly evident this quarter reflected by Class A vacancies, which shrunk 21 basis points. Canadian office vacancy rates were mixed for the quarter, with central business district (CBD) vacancies falling 26 basis points to 6.75 percent, and suburban vacancies increasing 16 basis points to 8.76 percent.
Office absorption positive for fourth consecutive quarter. The U.S. office market registered a fourth straight quarter of rising occupancies. First-quarter absorption came in at 8.1 million square feet (MSF)—substantially below the fourth quarter of 2010, when occupied space increased by 14.8 MSF, but a considerable improvement from a year ago, when occupied space contracted by 5.1 MSF. Repeating a trend witnessed last quarter, Class A buildings continued to attract “move-up” tenants with Class A absorption totaling 10.4 MSF, compared to Class B and C buildings which saw a mild contraction in occupied space. Canadian markets also recorded an increase in occupied space during the first quarter, with absorption totaling 2.6 MSF. This was just marginally below the 2.3 MSF recorded in the fourth quarter.
Rents continue to form a bottom. First-quarter data shows CBD rents increased by 0.7 percent to average $39.55 per square foot. This came on top of 0.9 percent increase in the fourth quarter. Suburban rents increased by 0.6 percent to register $26.20 per square foot. Although small, this was the first increase in suburban rents since Q1 2008. Taking out the effects of some of the larger, higher-priced markets, both downtown and subur-ban rents held steady during the quarter. Canadian downtown office rents moved higher during Q1 with CBD quoted rents increasing 4.2 percent while suburban rents increased 3.1 percent.
Office construction takes a surprising jump. First-quarter office comple-tions totaled 7.5 MSF, nearly doubling the fourth quarter, when construc-tion totaled 3.8 MSF. By historic standards, however, first-quarter comple-tions were extremely low—a trend that is expected to continue. It should also be noted that four markets account for more than 50 percent of Q1 new supply: downtown Cincinnati, downtown Houston, downtown Seattle, and Menlo Park on the San Francisco Peninsula. Going forward, office development will remain extremely subdued, reflected in construction activity which registered just 25.7 MSF at the end of the quarter. Last quarter, construction underway registered 22.3 MSF. The Canadian office market had very little new construction during the first quarter, adding just 336,000 square feet; however, across the country 6.6 MSF was under construction at the end of the quarter.
U.S. Office Market Begins the Year on a Soft NoteContinued from page 1
MARKET ABSORPTION (SF)
San Francisco Peninsula 1,586,000
Northern New Jersey 1,281,000
Dallas 766,000
Raleigh/Durham 641,000
San Jose/Silicon Valley 416,000
Houston 391,000
San Diego 296,000
Denver 231,000
Mon
th to
Mon
th C
hang
e, th
ousa
nds
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar-10
Inventory – Includes all existing multi- or single-tenant leased and owner-occupied office properties greater than or equal to 10,000 square feet (net rentable area). In some larger markets this minimum size threshold may vary up to 50,000 square feet. Does not include medical or government buildings.
Vacancy Rate – Percentage of total inventory physically vacant as at the survey date including direct vacant and sublease space.
Absorption – Net change in physically occupied space over a given period of time.
New Supply – Includes completed speculative and build-to-suit construction. New supply quoted on a net basis after any demolitions or conversions.
Annual Quoted Rent – Includes all costs associated with occupying a full floor in the mid-rise portion of a Class A building inclusive of taxes, insurance, maintenance, janitorial and utilities (electricity surcharges added where applicable). All office rents in this report are quoted on an annual, gross per square foot basis. Rent calculations do not include sublease space.
Cap Rate – (Or going-in cap rate) Capitalization rates in this survey are based on multi-tenant institutional grade buildings fully leased at market rents. Cap rates are calculated by dividing net operating income (NOI) by purchase price.
Note: SF = square feetPSF = per square footCBD = central business district
Glossary
HIGHLIGHTS | Q1 2011 | OFFICE | NORTH AMERICA
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COLLIERS INTERNATIONAL
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FOR MORE INFORMATION
Ross J. MooreChief Economist | USATEL +1 617 722 0221EMAIL [email protected]
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The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.
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UNITED STATES | OFFICE INVESTMENT
MARKET
CBD SALES PRICE
(USD PSF)
CBD CAP RATE
(%)
SUBURBAN SALES PRICE
(USD PSF)
SUBURBAN CAP RATE
(%)Atlanta, GA 125.00 8.52 141.00 9.08 Bakersfield, CA – – 178.56 7.25 Baltimore, MD – – 181.00 7.50 Boston, MA 558.00 5.70 128.00 –Charleston, SC 250.00 8.00 135.00 11.00 Chicago, IL 165.00 7.25 106.00 8.50 Columbus, OH – 105.00 7.00 Dallas/Fort Worth, TX 80.00 8.00 110.00 7.50 Denver, CO 280.00 7.50 150.00 8.20 Fairfield County, CT – – 250.00 8.00 Fresno, CA 105.00 9.00 140.00 8.50 Ft. Lauderdale/Broward Co., FL – – 94.00 7.00 Greenville, SC – – – –Hartford, CT – – 34.00 9.45 Houston, TX 191.50 7.50 175.00 8.10 Jacksonville, FL 90.95 9.80 116.25 8.75 Kansas City, MO-KS – 8.00 – 8.00 Las Vegas, NV – – 51.43 –Little Rock, AR 88.00 9.50 110.00 9.25 Long Island – Nassau, NY – – 75.00 6.10 Long Island – Suffolk, NY – – 75.00 6.10 Los Angeles – Inland Empire, CA – – 89.00 –Los Angeles, CA 300.00 5.50 250.00 8.00 Miami-Dade, FL – – 225.00 –Nashville, TN – – 65.00 7.75 New York, NY – Downtown Manhattan 97.00 6.90 – –New York, NY – Midtown Manhattan 404.00 5.00 – –New York, NY – Midtown S. Manhattan 404.00 5.00 – –Oakland, CA – 8.00 – 9.00 Orange County, CA – – 175.00 8.00 Philadelphia, PA 132.00 9.00 117.00 9.00 Phoenix, AZ 129.00 – 70.00 10.00 Pleasanton/Walnut Creek, CA 112.50 8.00 87.50 8.50 Raleigh/Durham/Chapel Hill, NC 292.07 – 129.22 –Sacramento, CA 180.00 8.10 135.00 8.30 San Diego County, CA – – 190.08 –San Francisco Peninsula, CA – – 250.00 6.50 San Francisco, CA 317.00 6.50 – –Seattle/Puget Sound, WA 152.16 8.14 90.53 7.02 St. Louis, MO 90.00 9.00 127.00 8.50 Stamford, CT 350.00 8.00 – –Stockton/San Joaquin County, CA 125.00 8.60 – –Tampa, FL – – 191.50 9.50 West Palm Beach/Palm Beach Co., FL – – 217.00 9.25 Westchester County, NY – – 250.00 8.00 White Plains, NY 350.00 8.00 – –
CANADA | OFFICE INVESTMENT
MARKET
CBD SALES PRICE
(CAD PSF)
CBD CAP RATE
(%)
SUBURBAN SALES PRICE
(CAD PSF)
SUBURBAN CAP RATE
(%)Calgary, AB 380.00 6.50 350.00 7.00 Edmonton – – 360.59 6.43 Guelph, ON 140.00 7.50 150.00 7.50 Halifax, NS – – 125.00 8.25 Kitchener-Waterloo, ON 140.00 7.50 150.00 7.50 Montreal, QC 275.00 7.00 190.00 7.50 Ottawa, ON 270.00 7.25 145.00 7.60 Regina, SK 98.00 8.00 – –Saskatoon, SK 240.00 7.00 – –Toronto, ON – – – –Vancouver, BC 400.00 5.75 300.00 6.50 Winnipeg, MB 155.00 7.75 135.00 7.75