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Commercial real estate takes economy’s pulse

Commercial real estate is a good yardstick in measuring how the broader economy is doing. bizO-Metcalf_Richard_BizOWhen the economy is doing well, vacancy rates fall and rents go up. When the economy is doing poorly, the opposite happens – vacancy rates go up and rents fall.

“Where are we now in the cycle?” Walt Arnold of Sperry Van Ness/Walt Arnold Commercial Brokerage said.

“Even though we’ve had some job growth this year, we haven’t replaced all the jobs lost during the recession. Outside of retail, we’re not seeing significant private-sector development,” he said. “Until both those things move in the right direction, the office and industrial markets aren’t going far.”

MB_outlook-monday_Commercial-vacancy_WEBBased on statistics in fourth-quarter market reports from commercial real estate services company Colliers International, the office, industrial and retail property types were on a very gradual trajectory of improvement in 2015.

“Lack of new construction with speculative space, not build-to-suits or owner-developed projects, is behind the improvement,” said Ken Schaefer Colliers International. “It’s not so much the economy.”

The office market, which registered historically high vacancy rates for the fifth year in a row, showed some marginal improvement. The industrial market’s vacancy rate dropped to the lowest level since early 2008, but has yet to inspire the kind of new construction typical in a low-vacancy environment.

“Flat had become the new normal,” said Jim Chynoweth of commercial real estate services company CBRE. “I think we got beyond that last year. There was positive movement. The real differentiator was we saw fewer companies downsizing or leaving the market altogether.”

The office vacancy rate dropped to 19.9 percent in the fourth quarter from 20.2 percent in the third quarter and 20.9 percent in the fourth quarter of 2014, according to Colliers. The last time the rate was below the 20 percent threshold was the first quarter of 2014.

For perspective, the vacancy rate averaged 13.2 percent in 2004-09. The office market crashed the next year, when the vacancy rate shot up from 15 percent in the fourth quarter of 2009 to 17.1 percent in the first quarter of 2010. The rate peaked at 21.5 percent in the third quarter of 2014.

“The trend or theme of our market right now is flight to quality,” said Scott Throckmorton of Argus Investment Realty. “The higher-quality buildings are absorbing. The amount of space you can get in those buildings is getting fairly limited.”

Vacant space is gradually becoming more concentrated in lower-grade buildings with lower rents, which serves to drive down the average asking lease rate for the overall office market.

The average asking lease rate for Class B office space was $15.82 a square foot in the fourth quarter, the lowest it’s been since the third quarter of 2006. Class B office buildings make up more than two-thirds of the metro’s inventory of rentable office space.

The office market is heavily dependent on employment in the services-providing part of the metro economy, where employment has returned to 2007 levels. However, the services economy saw a shift in its makeup during the recession.

The education and health services sector, which is mostly health care jobs, overtook the professional and business services sector about five years ago as the metro’s biggest. Most health care workers work in medical facilities, not office buildings.

Encompassing a wide range of employees from Sandia National Laboratories to call centers, professional and business services is the biggest private-sector user of office space.

The employment sector was hammered by the recession, hemorrhaging 11,400 jobs from its peak of 66,100 in August 2008 to 54,700 in February 2011, according to state data. Professional and business services jobs were largely stagnant until 2015, when growth returned. As of November, the sector had 61,400 jobs in the metro.

The late recovery in professional and business services employment has, in turn, helped to delay the recovery in the office market.

The industrial vacancy rate dropped to 6.4 percent from 6.7 percent in the third quarter and 6.9 percent in the fourth quarter of 2014. The rate’s most recent high-water mark was 10.3 percent in the fourth quarter of 2012. The vacancy rate averaged 8.5 percent in 2004-09. Most of the activity in the industrial real estate market is in warehousing and distribution, not in plants and research buildings.

Employment in the goods-producing job sectors, mostly manufacturing and construction, is still running at a little better than two-thirds of what it was in the mid-2000s.

The retail vacancy rate nudged up to 6.1 percent in the fourth quarter from 6 percent in the third quarter, but was well down from 6.6 percent in the fourth quarter of 2014.