Yes, about time! Real estate prices starting to crack, I have been waiting for this signal>>
Suburban Office Property Values Off
bloomberg.com
By Robert Burgess
Oak Brook, Illinois, March 8 (Bloomberg) -- Richard May has tried for three months to find occupants for almost an acre of vacant office space he owns in a suburban Chicago building.
``That space is a big concern for us,'' said May, chairman and chief executive of Oak Brook, Illinois-based Great Lakes REIT Inc., which owns about 5.2 million square feet of real estate. The biggest office construction boom since the 1980s has given potential tenants too much choice, he said.
The same scenario is playing out in most U.S. suburbs, where a flood of new buildings and a slowing economy are driving down property values for investors like May for the first time since late 1998. Then, world credit markets froze after Russia devalued the ruble, drying up capital available for real estate.
Buyers are requiring higher yields to compensate them for what is perceived to be increased risk in owning these properties.
``A year ago, suburban office buildings were priced to yield a 9 to 10 percent return,'' per year, said John Lyons, head of real estate investment banking firm Granite Partners in New York. ``Today, it's 10 to 11 percent.''
The difference means a building generating annual income of $2 million that would have sold for as much as $22 million a year ago would fetch as little as $18 million today, an 18 percent drop.
U.S. developers built 89 million square feet of office space in 2000, on par with the building boom of the 1980s, according to Torto Wheaton Research. Demand rose through the 90s as economic growth surged and unemployment fell to the lowest in a generation.
Suburban Migration
Most of the construction was in the suburbs, a response to technological advances allowing companies to put workers just about anywhere without a loss of productivity. That compares with booms in the 1960s and 1980s, when development was concentrated in inner cities.
With demand growing, the nation's office vacancy rate fell to about 7 percent in the third quarter of 2000, from 18 percent in 1992, according to Torto Wheaton.
Still, much of 2000's total demand of about 115 million square feet occurred in the year's first half, said Jim Costello, Torto Wheaton's senior economist. In the fourth quarter, 32 million square feet of space was put in service, while only 20 million was required, he said.
The suburban office vacancy rate rose to 9.1 percent in the last three months of the year from 8.6 percent in the prior quarter, and above the average 6.8 percent in the nation's downtowns.
Investors now are concerned that the need for suburban office space will dwindle further, especially as the stock market's decline pushes Internet, computer and other technology firms to conserve cash by firing workers and giving space back to their landlords.
Less Demand
``We have definitely seen a slowdown in demand,'' said Thomas Carr, chairman and chief executive of Washington, D.C-based CarrAmerica Realty Corp., which owns or has a stake in more than 280 mostly suburban office buildings across the U.S.
Further weighing on property values, developers can't quickly shut off the supply of space because of the long lag times of development, analysts say. Torto Wheaton expects 111.7 million square feet of space to be delivered this year even as demand keeps falling.
``In general, we see rising vacancy rates,'' said Costello.
Markets where supply is expected to exceed the demand the most are San Jose, California, Sacramento, California, Tampa-St. Petersburg, Florida, Salt Lake City-Ogden, Utah, and Norfolk- Virginia-beach, Virginia, according to Credit Suisse First Boston.
Meanwhile, investors are gravitating to downtown office properties, keeping building prices there steady. In the second half of 2000, 57 percent of office investments were in downtown areas, up from 44 percent two years earlier, according to Granite Partners.
Developers planning to sell some of their older properties for cash to pay down debt or buy new buildings will suffer the most from the drop in values in the suburbs, analysts said.
Those companies ``may have some problems,'' Credit Suisse First Boston real estate analyst Larry Raiman wrote in a recent research report.
Getting Out
Keystone Property Trust, based in West Conshohocken, Pennsylvania, is selling off all its suburban office properties to focus on its warehouses. The company just completed the sale of four of its office buildings in Allentown, Wyomissing and Mechanicsburg, Pennsylvania, for $35.8 million, a price that translates into a return of 11 percent for the buyer. A year ago, Keystone might have gotten more than $39 million, analysts said.
``Owning office buildings in places like Albany and Syracuse just isn't compelling,'' said John Begier, executive vice president of Keystone. ``In the more secondary markets, demand is even more tepid.'' |
