HIGHLIGHTS NORTH AMERICA WWW.COLLIERS.COM Q4 2012 | OFFICE KEY TAKEAWAYS • The North American and U.S. office vacancy rates declined further during Q4 2012 to 14.09% and 14.63%, respectively. This was the fourth consecutive quarter of improvement for the 6.4 billion square feet of inventory in the 85 North American office markets tracked by Colliers. • The market uncertainty and volatility of 2H2012 inhibited neither office leasing or transaction activity. Q4 North American net absorption of 21.1 MSF was more than double Q3’s 10.4 MSF. 2012 total net absorption was 50.7 MSF (roughly the office inventory of Ft. Lauderdale), the best since the 2008–2009 financial crisis. • Major office property transactions totaled $77.6 billion in 2012, and surged at year-end 2012. Q4’s $29.1 billion in office building sales surpassed all prior quarters in 2012, according to Real Capital Analytics. MARKET INDICATORS Relative to prior period NORTH AMERICAN OFFICE MARKET Summary Statistics, Q4 2012 US Q4 2012 US Q1 2013* Canada Q4 2012 Canada Q1 2013* VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE *Projected Construction is the change in Under Construction Sq. Ft. By Region 2.00000000 1.00000000 2.00000000 Total_OffSF-Vacant_OffSF Vacant_OffSF Absorption Per Market (SF) q3 '12 - q4 '12 2,500,000 1,250,000 250,000 -250,000 -1,250,000 -2,500,000 2 billion 1 billion 200 mil. Occupied Sq. Ft. Vacant Sq. Ft. NORTH AMERICAN OFFICE VACANCY, INVENTORY AND ABSORPTION – Q4 2012 US CAN NA VACANCY RATE 14.63% 6.80% 14.09% Change From Q3 2012 -0.21% -0.26% -0.21% ABSORPTION (MSF) 18.8 2.3 21.1 NEW CONSTRUCTION (MSF) 9.1 1.5 10.6 UNDER CONSTRUCTION (MSF) 39.5 11.3 50.8 ASKING RENTS PER SF US CAN Downtown Class A $41.22 $51.42 Change from Q3 2012 0.17% 1.67% Suburban Class A $26.21 $31.94 Change from Q3 2012 0.08% 0.16% Unlocking 2013 Office Property Performance What will be the right combination in 2013? K.C. CONWAY, MAI, CRE EMD | Market Analytics
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HIGHLIGHTSNORTH AMERICA
WWW.COLLIERS.COM
Q4 2012 | OFFICE
KEY TAKEAWAYS• The North American and U.S. office vacancy rates declined further during Q4 2012 to 14.09%
and 14.63%, respectively. This was the fourth consecutive quarter of improvement for the 6.4 billion square feet of inventory in the 85 North American office markets tracked by Colliers.
• The market uncertainty and volatility of 2H2012 inhibited neither office leasing or transaction activity. Q4 North American net absorption of 21.1 MSF was more than double Q3’s 10.4 MSF. 2012 total net absorption was 50.7 MSF (roughly the office inventory of Ft. Lauderdale), the best since the 2008–2009 financial crisis.
• Major office property transactions totaled $77.6 billion in 2012, and surged at year-end 2012. Q4’s $29.1 billion in office building sales surpassed all prior quarters in 2012, according to Real Capital Analytics.
MARKET INDICATORSRelative to prior period
NORTH AMERICAN OFFICE MARKETSummary Statistics, Q4 2012
US Q4
2012
US Q1
2013*
Canada Q4
2012
Canada Q1
2013*
VACANCY
NET ABSORPTION
CONSTRUCTION
RENTAL RATE
*Projected
Construction is the change in Under Construction
Sq. Ft. By Region
2.00000000
1.00000000
2.00000000
Total_O�SF-Vacant_O�SF
Vacant_O�SF
Absorption Per Market (SF)q3 '12 - q4 '12
2,500,000
1,250,000
250,000-250,000
-1,250,000
-2,500,000
2 billion
1 billion
200 mil.
Occupied Sq. Ft.
Vacant Sq. Ft.
NORTH AMERICAN OFFICE VACANCY, INVENTORY AND ABSORPTION – Q4 2012
US CAN NA
VACANCY RATE 14.63% 6.80% 14.09%
Change From Q3 2012 -0.21% -0.26% -0.21%
ABSORPTION (MSF) 18.8 2.3 21.1
NEW CONSTRUCTION (MSF) 9.1 1.5 10.6
UNDER CONSTRUCTION (MSF) 39.5 11.3 50.8
ASKING RENTS PER SF US CAN
Downtown Class A $41.22 $51.42
Change from Q3 2012 0.17% 1.67%
Suburban Class A $26.21 $31.94
Change from Q3 2012 0.08% 0.16%
Unlocking 2013 Office Property PerformanceWhat will be the right combination in 2013?
K.C. CONWAY, MAI, CRE EMD | Market Analytics
P. 2 | COLLIERS INTERNATIONAL
HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA
KEY TAKEAWAYS (continued)
• Capital is migrating out of the risk curve for investment in office building assets in search of yield. This trend, reported by Colliers in previous 2012 reports, was corroborated by the recent Association of Foreign Investors in Real Estate report in which four of the top five markets for investment were in the U.S., including Houston for the first time.
• “ICEE” office markets are still hot. Intellectual Capital, Energy and Education (ICEE) markets continue to capture a disproportionate share of North American office absorption. During 2012, two-thirds of the 10 North American MSAs with the greatest absorption are characterized as ICEE markets. We see this trend continuing in 2013 as technology, energy and knowledge gateway centers remain the dominant generators of office-related employment.
• Medical Office has been a sleeper office sub-property type that saw a 30% growth in transaction activity in CY 2012 to $6.1 billion, or just shy of the 10% total $77.6 billion in CY 2012 office property sales. And, approximately half of the 71 MSF of office space under construction in the U.S. at the onset of 2013 is for medical-related use.
• Recovery in housing is an overlooked office demand driver that will gain additional traction in 2013.
-183.2
-130.9
-14.4
-0.5
0.0
13.3
24.4
138.9
190.2
203.3
330.0
365.7
-300.0 -200.0 -100.0 0.0 100.0 200.0 300.0 400.0
Ottawa, ON
Vancouver, BC
Victoria, BC
Halifax, NS
Winnipeg, MB
Edmonton, AB
Waterloo Region, ON
Saskatoon, SK
Regina, SK
Toronto, ON
Calgary, AB
Montréal, QC
Thousands
CANADIAN OFFICE ABSORPTION BY MARKET Q4 2012
IN THIS QUARTER’S REPORT, WE TAKE A LOOK AT THE COMBINATION TO UNLOCKING VALUE IN 2013:
RIGHT 14: In 2013 look for North American vacancy to drop below 14%, fueled by another 50 MSF of absorption.
LEFT 80:total office transactions above $80 billion
RIGHT 10: CMBS office property delinquencies rate below 10%
LEFT ICEE: Office job growth in Tech/Energy/Education MSAs outperforms FIRE MSAs for a third consecutive year
RIGHT MO: Medical Office is the emerging leader among office sub-property sectors
0.00
0.00
0.05
0.07
0.08
0.13
0.19
0.30
0.36
1.56
1.66
2.78
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Edmonton, AB
Victoria, BC
Saskatoon, SK
Waterloo Region, ON
Regina, SK
Winnipeg, MB
Halifax, NS
Montréal, QC
Ottawa, ON
Vancouver, BC
Calgary, AB
Toronto, ON
Millions
CANADIAN OFFICE UNDER CONSTRUCTION BY MARKET Q4 2012
Note: Q3 data reported for Winnipeg, MB
See page 7 for details
HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA
COLLIERS INTERNATIONAL | P. 3
North American Downtown Markets:Excluding renewals, of the leases signed this quarter, did most tenants:
Hold Steady69.1%
Expand16.2%
Contract14.7%
North American Downtown Markets:What was the trend in Free Rent (in months)o�ered by CBD landlords this quarter?
Same80.9%Less
14.7%More4.4%
North American Downtown Markets:What was the trend for tenant improvement allowances o�ered by CBD landlords this quarter?
Hold Steady91.2%
Contract2.9%
Expand5.9%
North American Suburban Markets:Excluding renewals, of the leases signed this quarter in your CBD/downtown, did most tenants:
Hold Steady60.3%
Expand30.9%
Contract8.8%
IN BRIEF: OFFICE OUTLOOK 2013 2012 finished—and 2013 began—as Colliers observed in fall 2012: with progress on all fronts.
• North American Office Vacancy falls to just 14.09% at YE 2012.
• Net leasing activity best in five years: i) 21.1 MSF in Q4 2012; and ii) 50.7 MSF for CY 2012
• A 19% surge in office building sales surpasses 2004 transaction volume (3,000+ properties totaling approximately $78 billion during 2012)
Despite the harmful summer “UV (Uncertainty & Volatility) rays” during 1H2012, and lingering anxiety surrounding the U.S. fiscal debt crisis, ongoing Eurozone recession, the cost and logistics of implementing Obamacare, and anemic job growth (150,000/month) for two consecutive years, office real estate is persevering and returning to a state of balance. However, the recovery is broadening, both in the factors that have driven it over the past 12 months, as well as the markets that it’s reaching. No longer is the recovery confined to the CBDs of the “sexy six” core MSAs of New York, Boston, Chicago, Los Angeles, San Francisco and Seattle; it’s expanding to suburban submarkets and secondary MSAs. Real Capital Analytics’ Office Year In Review report noted a 31 percent increase in suburban office building sales during 2012, and a 40 percent increase in office building sales outside the six core MSAs. While this new interest is driven by a dearth of assets in the core MSAs and the search for yield in response to Federal Reserve monetary policy and cap rate compression, it has been office job growth in technology, energy and primary-education focused MSAs (what Colliers coined the Intellectual Capital, Energy and Education, or “ICEE” markets in 2011) that has defined which secondary markets were participating in this broadening recovery in the office property sector thus far.
In 2013, two other positive influences will impact this expansion: the housing recovery and growth in medical office demand. Both are broad-based across the U.S. and will have more of an effect on suburban office submarkets than CBDs. Why? First, professional services associated with a rise in new home construction and existing home sales activity will rebuild in proximity to this increasing housing activity in the suburbs. Second, our healthcare delivery model is shifting from one concentrated on expensive urban hospital campuses to less capital-intensive, suburban outpatient facilities.
The ICEE, housing, and medical office factors, along with the continuing search for yield by investors, add up to M.O.T.S (More Office To Secondaries) in 2013. As the diagram below depicts, rising absorption and modest new supply are driving vacancy down, and the requisite conditions to improve NOI are in place to absorb any interest rate risk in 2H2013.
BEHIND THE STATISTICS & BEYOND THE BASICSScope of Colliers Office Outlook Report: Colliers monitors office property conditions in 85 North American markets from Toronto to Tampa, totaling 6.4 billion square feet of inventory. Approximately 93 percent (6.0 billion square feet) of this inventory is located in the United States.
The largest 20 North American markets (those with at least 100 MSF of existing inventory) constitute approximately 60 percent of the 6.4 billion square feet of North American office space tracked by Colliers. All of the >90 million-square-foot markets are located in the U.S., except one: Toronto.With respect to 2012 net absorption, just 10 of the 85 markets accounted for 53 percent of the 50.7 MSF of net absorption, and all but one market (Calgary) are located in the U.S. Below are the ten absorption-leading MSAs for 2012—seven of which are ICEE markets.
US CA NA
Vacancy Rate: 14.63% 6.80% 14.09%
Change from Q3 2012 -0.21% -0.26% -0.21%
VacancyFrom a regional perspective, Canada has the lowest average vacancy rate at 6.8 percent; and in the U.S., the Northeast has the lowest vacancy rate just shy of 14 percent. The highest vacancy rate among North American regions is the Western U.S. at 15.27 percent. The South and Midwest have average regional vacancy rates of 14.81% and 14.71%, respectively. Housing has been slow in its recovery in both these regions, and the job growth has been more focused on manufacturing, transportation and distribution, favoring industrial real estate over office.
AbsorptionThe final tally on 2012 net office absorption was not in the cards in mid-2012, when it appeared that tenants and businesses were pulling back from leasing activity driving absorption down 6% over the prior six-month period (2H2011). However, despite the market’s anxiety over the November 2012 election and the Fiscal Cliff, 2012’s net office absorption had its best performance since the 2008–2009 financial crisis. Q4 net absorption was more than double that for any prior quarter during 2012 (21.1 MSF in Q4 compared to 10.0 MSF for the rest of the year). Which markets outperformed and why? Examination of the top ten North American markets with respect to absorption in Q4 and YTD 2012 reveals the impact of ICEE employment drivers, commencement of a true housing recovery, and importance of having a nationally or regionally recognized medical center.
MSA 2012 ABSORPTION
1 Houston (ICEE) 4.50 MSF
2 Dallas (ICEE) 2.90 MSF
3 Atlanta (ICEE) 2.80 MSF
4 Detroit 2.75 MSF
5 Chicago 2.70 MSF
6 Calgary (ICEE) 2.5 MSF
7 Phoenix 2.4 MSF
8 Boston (ICEE) 2.2 MSF
9 Philadelphia (ICEE) 2.2 MSF
10 Seattle (ICEE) 2.2 MSF
ICEE MARKETS LEAD IN 2012 ABSORPTION
MSA Q4 2012 MSA CY 2012
1 Detroit (Auto + Housing)
1.66 MSF Houston 4.50 MSF (ICEE) + Medical Center
2 Phoenix 1.46 MSF Dallas 2.90 MSF (ICEE) + Medical Center
3 Chicago 1.13 MSF Atlanta (Housing Recovery)
2.80 MSF (ICEE) + Medical Center
4 Montreal (ICEE)
0.99 MSF Detroit 2.75 MSF Medical Center
5 Philadelphia (ICEE)
0.98 MSF Chicago 2.70 MSF Medical Center
6 Houston (ICEE)
0.93 MSF Calgary 2.5 MSF (ICEE)
7 Boston (ICEE)
0.93 MSF Phoenix (Housing Recovery)
2.4 MSF
8 Dallas (ICEE)
0.84 MSF Boston 2.2 MSF (ICEE) + Medical Center
9 Minneapolis 0.82 MSF Philadelphia 2.2 MSF (ICEE) + Medical Center
10 Sacramento 0.82 MSF Seattle 2.2 MSF (ICEE) + Medical Center
TOP MARKETS FOR ABSORPTION
HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA
COLLIERS INTERNATIONAL | P. 5
Looking at this list, several themes emerge:
• The overlapping seven MSAs: Seven of the top ten most active markets for leasing activity in Q4 were also among the ten most active MSAs for all of calendar 2012. Houston, Dallas, Detroit, Chicago, Phoenix, Boston, and Philadelphia are prominent in both categories.
• The predominance of ICEE: Seven of the top ten markets for net absorption in 2012 are MSAs with an ICEE employment profile (technology, energy and/or primary education).
• The increasing role of housing and medical office: However, only five of the top ten markets for Q4 leasing activity are ICEE MSAs. What explains the difference, and what explains the emergence of MSAs like Atlanta, Detroit and Phoenix? The answer is two-fold: 1) the real housing recovery is taking hold in even the most distressed housing markets, such as Atlanta, Detroit and Phoenix; and 2) high-profile medical centers are strongly impacting demand for medical office space: Eight of the leading MSAs for absorption in 2012 have nationally or regionally recognized medical centers.
Looking forward to 2013, the only brake on office leasing activity in key energy markets—Dallas, Denver, Houston, Oklahoma City, Philadelphia (impact of Bakken shale), and Calgary—will be the delayed delivery of new space under construction. Houston and Denver can’t complete new space fast enough to keep pace with demand. ICEE will also continue to be an important office space demand driver in markets like Atlanta and Detroit where auto technology is fueling demand for engineers, and the office space to house them. (In 2012, Porsche and General Motors both made material commitments to locating auto technology centers in Atlanta.) And, the housing recovery will benefit suburban office space demand as contractors and professional service providers (closing attorneys, architects, engineers, building inspectors, etc.) rebuild or expand their operations to service housing activity of approximately 1.0 million new units—after years of less than half that level of activity. Atlanta, Charlotte, Nashville, Phoenix, Tampa, and inland California markets will see the most benefit from this housing recovery in 2013. In aggregate, 2013 should surpass 2012’s 50 MSF of net absorption by conservative estimates of 15%–20%, or 57.5 to 60.0 MSF in total. Market forces will see 2H2013 disproportionately higher net leasing activity than 1H2013, as was the case in 2012.
Transaction ActivityTransactions of major office property were also uninhibited by 2H2012 uncertainty. There were more than 3,000 transactions in 2012, totaling $77.6 billion, with a noticeable surge at year-end 2012: the $29.1 billion in Q4 office building sales surpassed all prior quarters in 2012, according to Real Capital Analytics. As in recent years, New York, San Francisco, Los Angeles, Washington D.C., and Seattle accounted for approximately 50 percent of the total dollar volume of office building sales during 2012. Houston and Denver (two key ICEE MSAs) now rank among the top markets for office building transaction volume.
The $77.6 billion in office transaction activity from 2012 is likely to be surpassed in 2013, given the amount of idle domestic and foreign capital searching for yield in tangible assets, such as commercial real estate. The
Association of Foreign Investors in Real Estate’s annual 2013 Foreign Investment Survey ranked the U.S. as the top place overall to invest; four U.S. markets were among their top five picks, including Houston, which had never before made this report’s global ranking.
Construction ActivityTo assess the risk of overbuilding, new construction activity needs to be considered from three perspectives: 1) new supply as a percent of existing inventory; 2) geographic concentration; and 3) sub-property type concentration.
At the onset of 2013, approximately 78.5 MSF of new office supply is underway in the U.S. and Canada, according to Dodge Pipeline. That activity translates to a North American new supply to existing inventory ratio of 1.2%. Historically, only when this ratio passes 2.0% is it considered elevated and indicative of overbuilding risk. What’s more, the current supply-to-inventory ratio is actually much lower for most U.S. office markets due to geographic and sub-property type concentration.
With respect to sub-property type construction, 51% of the 78.5 MSF of total new supply is medical-office-related construction. Of the remaining 38.5 MSF, 17.55 MSF (45.7% of the non-medical office new supply) is concentrated in just five states. The following table delineates these geographic and sub-property type ratios:
Delineation New Supply (MSF) Ratio (%)
North America 78.5 100.0
Canada 7.2 9.2
United States 71.3 91.8
Office Property 78.5 100.0
Medical Office 40.0 51.0
Non-Medical Office 38.5 49.0
U.S. Non-Medical Office 38.5 100.0
Top 5 States 17.5 45.7
Texas 6.7 17.4
California 4.9 12.8
Pennsylvania 2.5 6.4
New York 2.0 5.2
New Jersey 1.5 3.9
P. 6 | COLLIERS INTERNATIONAL
HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA
ENGINEERING NEWS-RECORD’S CONSTRUCTION COST INDEX
YEAR JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC AVG
2013 9437 9453 Note: Construction Costs never dropped post 2007 & are rising at a faster pace.
INDEX METHODOLOGY: 200 hours of common labor at the 20-city average of common labor rates, plus 25 cwt of standard structural steel shapes at the mill price prior to 1996 and the fabricated 20-city price from 1996, plus 1.128 tons of portland cement at the 20-city price, plus 1,088 board-ft of 2x4 lumber at the 20-city price.
The good news is that the U.S. ratio of new supply to inventory (excluding medical office construction) is less than a one-half of one percent—the lowest since 2003. And, only 21 MSF of new construction is underway outside of the five most active states, where energy and technology companies, such as Exxon Mobil and Shell Energy in Texas and Endo Pharmaceutical in Pennsylvania, account for 60 percent of activity.
However, rising construction costs are a concern that spans all commercial property types. It may surprise many to learn that construction costs never actually declined during the 2008–2009 financial crisis and the ensuing recession. As documented by the Engineering-News Record, Construction, costs have risen 17% since the end of 2007, and are up over 5.0 percent since February 2011. Investors and developers considering new construction investments should budget construction cost increases at double the CPI for 2013 and 2014, due to pressures on labor and materials.
CAPITAL MARKETSWhat is better than improving office property type fundamentals? For those that purchased any of the 3,000 office properties that traded in 2012, the answer is availability of capital. Domestic and foreign sources are flush with capital ready to invest in tangible assets like real estate, that can offer 2.5 to 3.0 times the yield offered by the U.S. government’s 10-year Treasury bond. And, the CMBS debt markets are opening up again after four consecutive years of annual new issuance below $50 billion. Underwriting terms and pricing spreads have also compressed in favor of borrowers: Improving market conditions have enabled even properties with elevated vacancy rates to become financeable again due to the low DSCR hurdle provided by sub-5.0 percent interest rates and 90 percent LTVs. Declining CMBS delinquency rates have further aided new issuance interest, and have CMBS investors enthusiastic about 2013 new issuance increasing 50 percent over 2012’s $50 billion level to $75 billion. If you have tenants, and can meet a 1.4 DSCR using a 4.5% loan coupon, the capital markets are once again open to refinance your office building.
JAN ‘13 DEC ‘12 NOV ‘12 3 MON 6 MON 1 YEAR
Industrial 11.32 11.24 11.48 11.53 11.72 12.14
Lodging 11.77 11.73 12.24 11.24 13.06 12.09
Multifamily 13.43 13.98 14.21 14.26 15.69 15.39
Office 10.48 10.66 10.37 10.20 10.69 8.90
Retail 7.79 7.62 7.75 8.03 8.03 7.88
Source: Trepp – January 2013 CMBS Delinquency Report
PERCENTAGE 30+ DAYS DELINQUENT BY PROPERTY TYPE
8
10
Jan 2012
9.529.37
Mar 2012 May 2012 Jul 2012 Sep 2012 Nov 2012 Jan 2013
12
9.68
10.0410.16
10.3410.13
9.999.69 9.71 9.71
9.579.80
PERCENTAGE 30+ DAYS DELINQUENT BY PROPERTY TYPE
Source: Trepp – January 2013 CMBS Delinquency Report
HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA
COLLIERS INTERNATIONAL | P. 7
THE COMBINATION TO UNLOCKING 2013 OFFICE PROPERTY PERFORMANCE
RIGHT 14 – Vacancy: If the absorption momentum from 2H2012 carries over into 2013 and Congress can maneuver its fiscal debt obstacle
course in 1H2013, the North American office vacancy rate will decline below 14.0 percent for the first time since 2005. Office property investors are keenly focused on the need for improvement in NOI in office properties going forward to be positioned to absorb higher interest rate costs 3-5 years out. Cap rate compression has aided property values the past two years, but future value enhancement will have to be unlocked through NOI improvement (i.e., increasing occupancy and rental rates).
LEFT 80 – Office Transaction Activity:With improving office property fundamentals and cheap debt to leverage transactions to maximize yield, 2013 should see office
transaction activity surpass the $80 billion mark by as much as 20%. The opportunity to unlock value here is in quality assets in secondary ICEE markets, such as Atlanta, Austin, Baltimore (now a post-Panamax ready port), Denver, Fort Worth, and Houston.
RIGHT 10 – CMBS Office Delinquency:For the capital markets to contribute to the improving office property conditions, CMBS delinquency rates need to continue
on their downward trajectory and remain south of 10 percent overall. As new issuance increases to a level north of $50 billion (increases the denominator in the delinquency calculation), and special servicers continue to resolve in excess of $1.0 billion in delinquent or defaulted loans (decreases the numerator portion of the delinquency ratio calculation), CMBS delinquency is likely to remain below 10 percent. This trend needs to translate over to the office property sector. With a January CMBS office delinquency rate of 10.48%, this ratio should decline further, and maybe even drop below 10%, as mature legacy office property loans are finally able to refinance. CMBS delinquency below 10 percent is critical to capital market confidence and unlocking more opportunity for office property leverage in 2013.
LEFT ICEE – Office Demand Drivers:The greatest opportunity for value enhancement and yield will remain in those secondary markets with an ICEE employment
profile. Traditional FIRE (Finance Insurance and Real Estate) markets are going to face office absorption headwinds as financial institutions reduce operating costs and the amount of office space they occupy. Financial institutions will be returning office inventory to the market undermining recent improvement in vacancy. For this part of the combination, turn to ICEE vs. FIRE.
RIGHT MO – Medical Office:The role of medical office space in the overall office vacancy picture warrants monitoring in 2013, particularly as the Obama
administration’s healthcare legislation and mandated healthcare exchanges are implemented. Due to strong demand and an absence of much new supply since 2007, demand for medical office space has risen dramatically and is fueling a boom in new construction. The states with the most medical office construction activity are Texas, California, Maryland, New York, North Carolina and Ohio. Medical office offers an unlocked opportunity as contraction continues among traditional users of office space, such as financial services firms. Do your homework before jumping into this sub-property sector, though. Vacancy and rental rates vary widely, and this subsector lacks the same availability of data and transparency as the greater North American office market.
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.
Accelerating success.
UNITED STATES | OFFICE INVESTMENT
MARKETCBD
SALES PRICE (CAD PSF)
CBD CAP RATE
(%)
SUBURBAN SALES PRICE
(CAD PSF)
SUBURBAN CAP RATE
(%)
San Francisco, CA 500.00 5.0
San Francisco Peninsula 250.00 7.0
San Jose/Silicon Valley 280.00 7.0 350.00 6.0
Savannah, GA 150.00 9.5 120.00 9.8
Seattle/Puget Sound, WA 170.22 4.4 367.60 7.4
St. Louis, MO 85.00 9.8 120.00 8.8
Stamford, CT 72.00 8.0
Tampa Bay, FL 115.62 7.4 120.87 9.0
Walnut Creek/Pleasanton, CA 210.00 7.5 180.00 8.0
Washington, DC 575.00 5.6 260.00 6.5
West Palm Beach/Palm Beach County, FL 122.00 188.00 6.4
Westchester County, NY 125.00 8.0
White Plains, NY 72.00 8.0
U.S. AVERAGES* 204.62 7.4 163.49 7.8
CANADA | OFFICE INVESTMENT
Calgary, AB 550.00 5.5 460.00 5.8
Edmonton, AB 354.67 5.8
Montréal, QC 275.00 6.5 190.00 7.3
Ottawa, ON 360.00 6.3 165.00 7.4
Regina, SK 125.00 7.0
Saskatoon, SK 240.00 7.0
Victoria, BC 354.00 6.2 280.00 6.3
Waterloo Region, ON 140.00 7.3 150.00 7.5
CANADA AVERAGES* 299.83 6.4 249.00 6.8
*Straight averages used.
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 of 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 feet MSF = million square feet PSF = per square foot CBD = central business district