Office Market in Recovery Mode?

Grubb & Ellis/Northco Real Estate Services has declared that the market for office space in the Twin Cities is in "full recovery mode."

But with a vacancy rate of 18.3 percent, the recovery may prove to be slow and painful.

Grubb & Ellis defines recovery in real estate markets in much the same way that the federal government defines recovery from a recession: two consecutive quarters of growth. But as is often the case in the rest of the economy, it could take some time before the effects of a turnaround are felt in the office marketplace.

"Things are getting better, but I think we're some time away yet from a full recovery," said Mike Gelfman, an office-space broker for Welsh Companies.

According to Grubb & Ellis' first-quarter survey of metro-area market trends, 483,000 square feet of office space were absorbed in the first quarter, chipping 1.3 percentage points off the vacancy rate. In the fourth quarter of last year, vacancy had fallen from 22 percent to 19.6 percent, marking the first drop in more than two years.

The suburbs saw the most improvement, according to Grubb & Ellis research analyst Matt Boehlke. Downtown Minneapolis is "still lagging a bit," he said.

Minneapolis as a whole has a vacancy rate of 20.2 percent. St. Paul's is 19.8 percent, and the suburban rate is 16.5 percent. The southwest suburbs showed the best rate at 15.2 percent.

Rents remained essentially flat, ranging from an average $23.67 per square foot for Class A office space in the central cities to $24.80 in the suburbs.

The survey's best news might be contained in trends that often are considered precursors to office-market growth.

"Investors are buying a lot of properties downtown," Boehlke said, referring to the 2004 sales of the IDS Center, Fifth Street Towers and the International Centre/Kinnard Financial Center, among others. Sales of downtown office buildings were three times higher last year than in 2003, and sale prices at year end were at a 10-year high, averaging $108 per square foot, according to United Properties Vice President Scott Pollock.

Another precursor: A slight rise in industrial development. While the industrial market by no means is in a full rebound, there are signs of improvement, which Boehlke said "typically happens before the office market recovers" because companies often hire industrial workers before they hire additional office staff.

A more solid sign of a recovery will come when speculative building starts again. So far, there is little commercial building of any kind in the Twin Cities; even pre-leased commercial construction is almost nonexistent. But Gelfman said he's seeing "more developers banking land, and that's always a precursor to development."

Most of the quarter's leasing activity involved either renewals or moves that didn't absorb much vacant space. "Reshuffling the deck," Gelfman called it.

Among the larger new deals: Mosaic Co., a maker of farm chemicals, leased 51,000 square feet at the Atria Corporate Center in Plymouth for its new headquarters, and the National Arbitration Forum leased 28,000 square feet at Park Place West in St. Louis Park.

Other cities are feeling the pinch. Dallas/Fort Worth has a vacancy rate of 24.2 percent; Atlanta's is 21.5 percent, and Denver's is 21 percent. At the other end of the scale, Miami's vacancy rate is 12.8 percent, Portland's is 13.9 percent, and Los Angeles' is 14.8 percent. Chicago is an anomaly: Its vacancy rate has risen steadily and sharply in the past few years, from 15.4 percent in the second quarter of 2003 to 18.7 percent.

The Grubb & Ellis survey showed continued strength in the Twin Cities retail market, which enjoys a 4 percent vacancy rate and lots of new development. More than 2 million square feet of retail space is under construction or planned for the next few years.

The industrial market remained flat, with a vacancy rate of 6.9 percent, though the survey reported that "construction and development projects have been picking up steam."

Apartment Investing

Here is a decent article on Purchasing Apartment Complexes as an Investment:

http://www.inman.com/inmannews.asp?ID=36954&CatType=B

REITs and YOU

Today I was in class at ProForce in Edina. Thought I would combine my need for continuing ed credits with a couple courses that might enrich my knowledge of REITs and 1031 exchanges. Overall, I was pleased with the first day. The instructor is knowledgeable, albeit not as much as I had hoped. He spent at least an hour and half pitching a new Mortgage REIT he liked.

However, I did pick up some very good tidbits, albeit information that I should have known already had I not been so caught up in this new web initiative.

Anyways, REITs (short for Real Estate Investment Trusts) are all the rage. In the coming days I will write more extensively on the REIT industry, because I really believe there are some good long term opportunities in REITs.

What did I learn today? I learned that the capital gains rate had fallen to 15%, well I knew that already...it was at 20%. What I did not know is that if you are in the 10 or 15% tax bracket, then your capital gains rate falls to 5%. That is actually significant for me, as the majority of my ordinary income is offset my my partnership losses. I am hoping to sell a fairly significant chuck of property this year, and that little tidbit that I might qualify for a 5% capital gains rate...would save me well over $50K!.

Anyways, tomorrow I am going to talk more about mortgage REITs and also post some resources for the REIT industry.

On a side note, this site is now doing over 1000 unique visitors per day!! Next goal: 1500...thanks for reading and please post comments if you have any questions about REITs.

Brent

The Scary World of Commercial Real Estate

Interesting article in the Washington Post