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2004 BROKER OUTLOOK
Brokers around the region weigh in on the immediate
future of western commercial real estate.
Jennifer Orr
Tired of the gloom and doom of 2002 and 2003, brokers are looking
forward to the benefits of the nation’s presumed economic
recovery. But will all western commercial real estate markets
share in the wealth?
Denver
As the dark clouds that have settled over our nation’s
economy finally begin to evaporate and companies start to consider
expansion plans, Denver will be primed to soak up the new waves
of development. Over the past few years, the city has been giving
itself the ultimate makeover: the Colorado Convention Center
is doubling in size; the Denver Art Museum is undergoing a $68
million expansion designed by architect Daniel Libeskind, winner
of New York City’s World Trade Center redesign project;
the Denver Auditorium Theater is being restored with an additional
400 seats; and Denver’s infrastructure is receiving a
major overhaul, with wider freeways and an enhanced light-rail
system.
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Miller |
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“Though the market is flat, people are planning for the
future,” says Sherman Miller, senior managing director,
Cushman & Wakefield. “As the economy turns and people
start looking at Denver, we’ll have something to sell.
It won’t be the same old tired freeway system, the same
small convention center and art museum. We have a story to tell
so when companies want to relocate or expand, Denver has something
to offer rather than the same-old, same-old.”
Denver’s future may look bright, but its present remains
murky. Miller says although the city’s real estate market
has experienced some leasing and investment sales activity,
the last 18 months have been stagnant. The office vacancy rate
continues to hover around 20 percent, and though more leases
are being signed, absorption is still negative. “It has
been like musical chairs, with a lot of backfilling of sublease
space in the marketplace,” says Miller.
Developers added about 500,000 square feet of office space to
the market in 2003, and Miller doesn’t expect any speculative
office construction in 2004.
Retail remains a bright spot. All development is preleased,
and investors have been active. Not so for the multifamily sector,
where investors are refinancing properties and holding on until
the market rebounds, says Miller.
The industrial market has fared better than the office market.
The vacancy rate is about 9 percent, and, as of third quarter
2003, the market had absorbed close to 900,000 square feet of
space. Developers are also more active in the industrial sector.
In fall 2003, ProLogis finished a building for General Motors,
a new 404,000-square-foot build-to-suit. And Lauth Property
Group will begin building its 425,000-square-foot speculative
development at Aurora Commerce Center in spring 2004.
Doesn’t such a large speculative project seem risky in
this market? Again, Denver is planning for the future: “The
theory is those large users who want to come to our marketplace
will have an alternative,” explains Miller.
Miller expects that if the economy can continue its positive
run for another two or three consecutive quarters, Denver, with
all of its improvement projects, should begin its own rebound
within a year.
Seattle
Seattle’s commercial real estate market tells much the
same story as the rest of the western markets — generally
speaking, the office sector suffers while retail shines.
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Guidinger |
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“For the first half of 2003, the Seattle/Puget Sound region’s
retail real estate market looked fairly healthy compared to
the office and industrial markets,” says Steven Guidinger,
president of Chesapeake Realty Advisors and International Council
of Shopping Centers’ state director for Washington and
Alaska. “Retail vacancy rates came in at 4.3 percent,
with net absorption (100,000-plus square feet) positive for
the first time in 2 years.”
Retail developers are active all over Seattle, with several
malls undergoing renovations. At Alderwood in Lynnwood, General
Growth is replacing the previous Nordstrom location with a 165,000-square-foot
open-air retail village and adding an additional 24,000 square
feet to the mall. When complete in 2004, it will exceed more
than 1.5 million square feet.
New retail construction is also occurring. Kemper Development
Company is developing a 1.4 million-square-foot mixed-use project
in Bellevue. The proposed Lincoln Square will feature a hotel,
condominiums and 380,000 square feet of retail. Lincoln Square
will eventually feature an office tower, but until the office
sector improves, that building is on hold, says Guidinger.
Office construction has slowed in Seattle as the market struggles
to absorb its excess space. According to Cushman & Wakefield
research, Seattle had 12.7 million square feet of vacant office
space by mid-2003.
However, some investor interest in office buildings could mean
good news down the road. During 2003, a German investment company
purchased downtown’s Millennium Tower; RREEF purchased
One Convention Place and West Lake Union Center; and G REIT
has agreed to purchase four buildings in Kent’s CenterPoint
Corporate Park. An official from the REIT’s management
arm told the Puget Sound Business Journal he sees Seattle’s
office sector eventually becoming a top market.
Rhyne Brown, senior vice president with NAI, agrees. “Seattle
is reasonably well positioned for the national recovery and
I think the overall economic signs are positive,” he says.
“Barring any negative news from any of the major employers
like Boeing or Microsoft, I expect Seattle to grow and expand
at a rate slightly ahead of the national recovery.”
California
The golden state of opportunity has just not been living up
to its reputation. Recently, California has been a state with
little opportunities, and many residents and businesses are
looking elsewhere.
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Brown |
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“From the perspective of the continued economic health
of California, there is nothing more critical than the retention
of business,” says NAI’s Brown. “The perception
is that California has become less friendly to business and
whether that’s right or wrong, the perception is widespread
nationally and globally.”
Fed up with the high price and bureaucracy of running a business
in California, many companies are leaving the state. Tired of
the high cost of living, many residents are following that lead.
And still worse, many California jobs are disappearing as well.
“The biggest trend is the outflow of white collar and
service-related jobs,” says Brown. “The grand recipient
of these jobs is primarily India.”
This trend will hit hardest in Northern California, which has
already borne the brunt of California’s weakened economy.
The dot-coms are long gone, and some doubt any will ever return.
“In the Bay Area, it’s not a pretty picture,”
summarizes Brown. The office market is soft in the San Francisco
Bay Area with 43 million out of the 209 million square feet
of office space available, and sublease space makes up 13 million
square feet.
The Bay Area’s industrial market, particularly the manufacturing
sector, is also struggling. Though the vacancy rate is about
7 percent, as of third quarter 2003, the manufacturing sector
had posted a negative absorption of close to 1 million square
feet. The Bay Area’s multifamily market has been strong,
but Class A product has been weakening. Retail also remains
healthy in the Bay Area and across the state.
The Los Angeles office and industrial markets are faring better.
The office sector is experiencing slightly more activity though
vacancy rates remain high. Los Angeles County’s industrial
sector has a vacancy rate below 5 percent. However, Brown explains
that businesses in Southern California pay fairly low rates
and can internally absorb the excess space. Thus, when economic
recovery comes, demand for industrial space will expand slowly.
Though California’s situation seems bleak, Brown still
has a positive outlook: “We’re a resilient state
and economy. Both the American and the Californian dream is
to creatively find out what’s next and, more importantly,
create what’s next. Then we’ll do well.”
Phoenix
The problems that affect California directly benefit Arizona,
especially the Phoenix market. “Employers that are fed
up with the red tape, the taxation and the high cost of doing
business in California come to Arizona for less regulation,
less cost, better-trained employees and more affordable housing,”
says Doug Fielding, vice president with Marcus & Millichap.
“We’re a big-time attraction for people wanting
to get out of the rat race in California.”
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Fielding |
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These California transplants help explain the single-family
development boom now occurring in Phoenix. Fielding says that
for the past 4 years, Phoenix has been setting records in the
creation of new homes. And these new rooftops are directly benefiting
Phoenix’s retail sector. “The freestanding pads,
the pad restaurants, the power centers, the grocery-anchored
centers, they’re all active,” says Fielding. “One
of the hottest things is the freestanding drugstore. The drug
chains have been very active and aggressive in acquiring sites
and building.”
Although residential and retail are thriving in Phoenix, the
city is not immune to the slow economy. “In our state
and county, the unemployment rate has gone up as it has everywhere
in the country,” says Fielding, “but our residential
development has fueled everything. Plus, people are still spending
money, which is keeping the economy going here. So it appears
to be healthier than most other areas.”
Still, Phoenix’s job growth remains flat, with no new
jobs being created. In addition, the city is feeling the negative
effects of past overbuilding in the office market. Plus, Fielding
says heavy competition in the office-condo market is further
depressing the office sector. Professionals are vacating high
rises to buy and finance their own spaces or buildings. Fielding
says office leasing is improving, but “we’re a long
way away from being healthy.”
The multifamily market is also suffering from an excess in product
and a flat job market. And the low interest rates aren’t
helping the situation. “People are vacating apartments
for starter homes where they can get in for as low as $100,000,”
says Fielding. “With interests rates down, you can have
a mortgage payment that’s at or below rent levels.”
He predicts the interest rates will start to rise again as the
economy gains strength, which will be the first step to an improved
multifamily market. In addition, he anticipates that consumer
spending will continue to progress. “Retail will continue
to do well. In the office and apartment markets, we might see
some gradual up-trends, but it’s going to take a couple
of years for us to absorb the vacancy that we have and get back
to what we would consider a healthy market.”
©2003 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
from France Publications, Inc. For information on reprints of
this article contact Barbara
Sherer at (630) 554-6054.
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