by Jodi Summers
2013 is indeed a happy new year for office real estate. Let us begin the drum roll of good news by letting you know that office vacancy rates are dropping…and that means higher cap rates and better sales prices are in the future. What’s more, the next wave of office architecture is up for your consideration.
Recent job creation increased absorption pushed down vacancy rates in the office, helped by the limited new supply of space. (Above and beyond the 400,000 sq.ft. of new office space Office in the newly opened Red Building @ Pacific Design Center.)
As our economy creeps back to life, 2012 saw U.S. office vacancies drop to their lowest level in almost three years. Major contributing factors are the demand from energy and technology companies combined with a dearth of construction.
The National Association of Realtors Commercial Real Estate Outlook Vacancy rates in the office sector are projected to fall from an estimated 16.7% in 4Q 2012 to 15.7% in the 4Q 2013. The markets with the lowest office vacancy rates presently (in the fourth quarter) are Washington, D.C., with a vacancy rate of 9.6%; New York City, at 10.1%.
The Los Angeles vacancy rate is estimated to be 12.5%.
“What these findings suggest is that, in general, the industry is moving forward bit by bit. Nothing indicates a quick turnaround for commercial real estate, but it is improving,” observes Stephen Blank, the senior resident fellow for real estate finance at the Urban Land Institute. “Those who are patient and willing to rethink their expectations and adapt to market realities are the most likely to come out ahead next year. Investors must keep in mind recent progress made in the industry as they prepare for a slow but steady recovery. “
Given the lackluster yields of securities, Sandy Paul, national research director for Delta Associates contends that betters want a winning horse, and their stallion is commercial real estate. “Investors are looking to place capital in assets that are income-producing and have the benefit of tangible value,” Paul maintains. “Investors also may be concerned about potential volatility ahead, such as was seen during the October 2008 financial crisis and the August 2011 downgrading of US debt. Domestic commercial real estate benefits from its traditional status as a safe haven during periods of uncertainty.”
The Los Angeles office real estate recovery will advance in 2013, making modest gains in leasing, rents, and pricing.
In Los Angeles, according to Loopnet, lease rates for office properties close out the year at $22.12 per square foot…up 0.7% from 2012. (And up 0.7% from 2011, as well.) As a point of perspective, July 2008 was the last lease rate peak, with asking rents averaging $27.01 per square foot. The lowest asking lease rate in the past three years was $21.87 set in February 2012. We are currently 4.5% off the zenith.
Please consider….there is new wave in office real estate rolling in…major tenants like Yahoo, Google and Red Bull, among so many others…are willingly pay high rents in return for more efficient design layouts and lower operating costs in LEED-rated, green projects. The EZ lease off of the future features open floor plans characterized by a lack of individual offices with walls and doors. More on this in the next blog…
We’re here to help you with your commercial and investment property needs. Please contact Jodi Summers and the SoCal Investment Real Estate Group @ Sotheby’s International Realty – email@example.com or 310.392.1211, and let us move forward together.
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