Tuesday, June 26, 2007

Commercial Real Estate: The Other Shoe Drops?

From the Sacramento Bee:

In the up-and-down world of office leasing, Roseville and Rocklin for years have been the closest thing around to a sure bet. Until now.

Demand for new leases is down. Office vacancies are up. And a lot more space is under construction. "After many years, South Placer County is changing from a landlord's market to a tenant's market," said developer Abe Alizadeh...."Incentives (for tenants) will be going up. Lease rates will be coming down."
"It's frightening," said Elaine Hartin, a broker with 17 years of experience in the Roseville office of Cornish & Carey Commercial.
The area's declining housing market has stifled the residential finance, insurance and real estate businesses that for years gobbled up office space. A glut of existing office space is for rent. A record level of offices are under construction.
What concerns Strain, Hartin and others examining South Placer County's office market is an obscure but important statistic that they watch, much as a cardiologist watches a heart patient's blood pressure. The statistic, called "net absorption," measures tenant demand for leasable space. It takes the office square footage newly leased in a given three-month period and subtracts from it any vacated office space during the same time.
For 55 consecutive quarters, stretching back to 1994, the Roseville and Rocklin market has not recorded a single negative absorption period, according to statistics compiled by the Sacramento office of commercial brokerage CB Richard Ellis....Residential finance companies fueled the winning streak in recent years as they flocked to South Placer County's booming housing market and drove demand for office space.
Two years ago, office net absorption in Roseville and Rocklin hit 471,398 square feet for the year, roughly equal to eight football fields of office space. It was the best year ever for the region's office leasing, statistics show.

But from that peak, net absorption plunged to a seven-year low of 294,000 square feet in 2006, as the housing boom ended and the companies that supported it downsized or, in some cases, went dark.

"They've almost all cut back. Some put their space on the market, subleased or closed," said Jon Walker, a senior vice president at Grubb & Ellis' Roseville office.

Office demand has plummeted further this year. Roseville and Rocklin's net absorption fell to a meager 16,500 square feet for the first quarter, down from 109,000 square feet for the same period in 2006. Second-quarter figures are due next month."Obviously, things have dropped off," Walker said. "The question is, how long will it last?"
"Roseville and Rocklin could potentially see 40 percent vacancies," [Chris] Strain [executive director of brokerage Cushman & Wakefield's Sacramento office] said. "And things won't come back to a reasonable level -- I'm talking about 15 percent vacancy -- for three years. And that's if the economy doesn't go south on us."
[W]ith 868,508 square feet of office space sitting empty -- and another 868,000 square feet under construction -- it's unlikely the market will turn around in the short term, said Grubb & Ellis' Walker. "I'm not preaching doom and gloom, but you've got to be realistic," he said. "We've got a lot of questions to answer."


Bakersfield Bubble said...

Right on the money Lander!

Local title company is shuttering 3 offices in town. Other real estate offices are closing. Meanwhile we are experiencing record permits for Commerical contruction in Bakersfield.

I wonder how this plays out?

I was having a commerical property appraised and I told the appraiser that the commerical market will look like the residentail market in 1-2 years, if not sooner. He agreed and then lowballed my appraisal. UGH!

Lander said...

"A sure bet"
Inventory glut
Demand drops
Price cuts

Does this sound familiar to anyone?

AgentBubble said...

Don't you just love history???

smf said...

Which reminds me, we have not worked on many Roseville offices lately.

People forgot how most everything follows residential construction.

After all, there are many ways of determining how much support buildings (offices, SCHOOLS, etc.) according to the assumed amount of population growth.

Since municipalities and builders determined this in one way by the amount of residential construction occurring, they overshot in both counts.

Maybe soon, the stupid people in construction (this has grown with the bubble) will be out of the business soon.

Sippn said...

SMF - chicken or the egg? Do people move here first then look for a job?

Agreed they're way over built for 2007 demand but would be out of space quickly if business demand recovers or somebody big moves here.

But yes, stupid there are..

HappyinSF said...

Off topic but, did anyone else notice that on the commercial for the new i-phone, where they are touting its internet connectivity, one of the news stories on the phone is about overpriced real estate in light of stagnant wages. Gotta love Tivo. It's funny, the bubble's gone from not existing to being in apple commercials within 2 years.

smf said...

"SMF - chicken or the egg? Do people move here first then look for a job?"

It would not matter. You build according to the expected population you will have.

Unfortunately, the expected population from the increased home construction was a phantom number, but I dare to say that commercial builders did not do an actual study of how many people were coming into the area, they simply assumed that if x number of houses were built, you need y number of office space.

And of course, as I repeated before, many have forgotten the reason population was increasing in the Sacramento area...LOW HOME PRICES...

Once that was removed, the expected population increase became much lower, if not negative.

Diggin Deeper said...

This market permeates all others according to Pimco's Bill Gross:

"To death and taxes you can add this to your list of inevitabilities,” Pimco’s Bill Gross offered. “The subprime crisis is not an isolated event and it won't be contained by a few days of headlines in The New York Times. It will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory.

"Ultimately… [subprime] will affect risk spreads in markets completely divorced from U.S. housing… Consumption will be reduced to say nothing of new home construction over the next 12-18 months… The willingness to extend credit in other areas -- high yield, bank loans and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction."

Isn't it obvious that if the residential real estate market craters it takes commercial with it at some point? Even more obvious if over building was based on a populus that never showed up?

Cmyst said...

"one of the news stories on the phone is about overpriced real estate in light of stagnant wages. "
Sadly, Happy, I did notice.....