Cushman & Wakefield Report Shows Strengthening Of Suburban Real Estate Markets As Available Space Shrinks In U.S. Cities
21 Sep, 2006, New York
Cushman & Wakefield Expects Widespread Rent Growth Across the Nation
Suburban markets of Chicago, Oakland, Minneapolis and Seattle experienced largest decline in vacancy rates
The U.S. suburban real estate markets will gain momentum over the next year as available space continues to decline in cities across the country, according to the Cushman & Wakefield U.S. Office Market Barometer, a gauge of real estate performance and expectations in 43 Central Business Districts (CBDs) and 53 suburban markets based on data compiled in the first half of 2006.
The shift to suburbia is based on a variety of factors, most notably a lack of new construction in major CBD markets, declining vacancy rates and rising rents in the CBDs.
Cushman & Wakefield expects rent growth in markets nationwide. San Francisco, Boston and Midtown NY are experiencing above average momentum, driven by strength in the finance and business sectors, both fundamental to job growth. This will lead to rent spikes.
As of mid-year, office leasing activity in CBDs combined was recorded at 40.5 million square feet (msf), slightly lower than mid-year 2005. Suburban market leasing levels were slightly above 2005. The CBD has a national vacancy rate of 11.9% down from 12.6% in the first quarter of 2006, and down 100 basis points from last year. Midtown South, N.Y., led the CBD market with a vacancy rate of 6.0%. Available space in suburban markets decreased, with 15.5% overall vacancy posted at mid-year, led by LA North at 7.0%.
“Space availability and rental rates in major cities are now reaching pre-economic downturn levels,” said Maria Sicola, senior managing director of Research for Cushman & Wakefield. “The lack of space options in major cities has made the suburban markets much more attractive and viable.”
According to Ms. Sicola, the CBDs are leveling off. “We are at or rapidly approaching equilibrium in virtually all U.S. CBDs.”
The Cushman & Wakefield Barometer classifies major U.S. CBDs and suburbs in four categories based on multiple factors, led by a market’s prior six-month performance and 24-month outlook. The classifications include Leading, Peaking, Strengthening and Leveling. A classification of Leading characterizes a market with strong prior six-month performance and an above average 24 month outlook. A Leveling market indicates a weaker previous six months and a lower than average 24 month outlook considered against the fundamentals of comparable U.S. markets.
The Cushman & Wakefield Barometer ranked the emerging suburban markets of Oakland, Los Angeles South, Minneapolis, Chicago, San Francisco, Boston, Memphis and Seattle in the Leading category. Four particular markets, Chicago, Oakland, Minneapolis and Seattle, all will experience declines in vacancy rates of more than 200 basis points over the next 24 months---a large drop compared to any other markets recorded in the study.
In contrast to the declining Midwest auto industry, manufacturing gains are fueling the suburbs of Chicago and Minneapolis, which has stimulated expansion in the transportation and distribution sectors. Developments in software and gains in high technology are promoting growth in the suburban markets of Seattle, Oakland and Boston.
The suburban markets of Kansas City, Louisville, Palm Beach and Miami are expected to experience growth in average rents of more than $3.00 per square foot over the next two years.
Traditional suburban leaders, Northern Virginia, Pinellas, Fla., and the Inland Empire, Calif., continue to set the pace for growth but are categorized as Peaking. Los Angeles Tri-Cities, Portland, Indianapolis, San Francisco Peninsula and Bellevue should strengthen by next year due to stronger levels of job growth compared with the rest of the country.
“As major cities reach equilibrium, suburban markets will gain momentum,” said Ms. Sicola. “By 2008, we will see the majority of suburban markets reaching equilibrium as well.”
The two Leading cities, Miami and Memphis, benefited from significant declines in vacancy and San Francisco and Boston are forecasted to experience substantial rent hikes over the next 24 months. Portland, Palm Beach, Nashville, Houston and Midtown South, N.Y., also continue to expand. Strong industries fundamental to job growth, such as financial and business services are driving the Leading markets, with Class-A space in high demand.
Palm Beach, Tampa, Bellevue, Miami, San Diego and all of Manhattan are forecasted to experience rent increases of more than $3.00 per square foot over the next two years.
On the office investment side, cap rates are declining in the CBD markets. On a more positive note, suburban markets are seeing cap rates leveling out and average closing prices per square foot continue to increase. Largely dependent on regional and local drivers as well as defined balance between supply and demand, the office market remains insulated from a declining economy and is expected to remain healthy though 2007.
Cushman & Wakefield is the world’s largest privately held real estate services firm. Founded in 1917, the firm has 189 offices in 57 countries around the globe, and 11,000+ talented professionals. Cushman & Wakefield delivers integrated solutions by actively advising, implementing and managing on behalf of landlords, tenants, and investors through every stage of the real estate process. These solutions include helping clients to buy, sell, finance, lease, and manage assets. C&W also provides valuation advice, strategic planning and research, portfolio analysis, and site selection and space location assistance, among many other advisory services. To find out more about Cushman & Wakefield, please call 1-800-376-3133.