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CRE snapshot: office, industrial & retail sectors

Statistics show negative absorption rates in the first two categories. The good news is “we haven’t overbuilt this cycle”

Everyone in banking is watching how the commercial real estate market performs in the current downturn. Residential real estate construction and development has been hit hard in many markets for some time, of course, so the attention is more on other categories—office space, industrial, retail. Scott Klug, central region vice-president, CoStar Group, Chicago-based providers of CRE information, gave an overview based on the data his firm regularly collects, during a session at ABA’s Annual Meeting, Oct. 26. 

Regarding the office market, he noted that employment is now where it was a decade ago, and the country has lost 2.3 million office jobs, with more to come. “The problem,” said Klug, “is we’ve developed 1.7 billion square feet of real estate in that time.” He said it will take nine million more jobs to fill that up that space to get back to the peak levels of the marketplace in 2007-8.
 
Klug reported negative absorption for eight quarters in a row on the office side (space  vacated by tenants exceeds space occupied by new tenants). The top five markets in the country have negative absorption in excess of 30 million square feet, he added. The vacancy rate averaged above 19% through third quarter, nationally. Downtown Detroit—the office-space poster child—is close to 30% vacancy.
 
On a positive note, Klug said, “One of the things that will help us is that we have not overbuilt” in the current cycle. Office properties sit on the market an average 371 days before sale. Sales prices are down—now below $150 per square foot in some key markets for class A office buildings. Class B buildings are not as bad—$84 per square foot on average.
 
Shifting to the industrial market, Klug said this is usually the last sector to get hurt. It is starting to feel pain, but not as much as the office sector, and it varies by market, with Houston, for example, showing new construction and positive absorption. On the national level, vacancy rates are over 10%. On sales side, said Klug, the national average price per square foot for industrial space is $68 versus $89 at the peak.
 
Finally, on the retail side, Klug said some sectors—health care, food services—were holding up, whereas shopping centers were way off. Next year looks pretty stagnant, he said. Vacancy rates of 7.6%, nationally, is better than the office or industrial markets, although vacancy rates continue to trend up as new space comes on line. Price per square foot has been steady compared to ten-year average, he noted. Also on the positive side, there is positive absorption in some areas and low vacancy rates in many core markets.

Bill Streeter

Bill Streeter has been a full-time business journalist for 40 years, 34 of them with ABA Banking Journal. During his time with the magazine, he rose from Assistant Managing Editor to Editor-in-Chief. He has guided the magazine’s editorial direction since 1985 and has been an observer of momentous changes in banking, from the introduction of ATMs to the 2008 financial crisis and passage of the Dodd-Frank Act. In 2012 Streeter became Editor & Publisher, responsible for the Banking Group overall including the magazine, ababj.com, and related e-newsletters.

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