The study notes "the magnitude and velocity of the recent rise in vacancy rates has certainly varied across markets and property types." But it adds that "while further softening is expected, vacancies should begin to correct as the economy continues to recover and demand growth rebounds. In addition, supply levels have been much more disciplined in this cycle, which will help prevent vacancies from reaching peak levels experienced in the last cycle."
"We should see things starting to recover by 2003," Nancy Chesley, real estate economist and product manager at PPR, tells GlobeSt.com. Chesley points out that construction has begun to shut down in most markets and demand is slowly recovering as the economy is beginning to show signs of improvements and lay offs are beginning to wrap up. In general, it takes about six months for the economic recovery to ripple through the real estate market and Chesley says that this case is no exception.
She is quick to add that a lot of markets are still left with quite a bit of sublease space and some metropolitan markets will take longer to absorb that space than others. In particular the high tech cities, such as San Francisco and Boston, will probably not see the incredibly low vacancy rates that they were seeing two years ago but Chesley emphasizes that that is not a bad thing. "They'll get back to a healthy level," she says, adding that vacancy rates around four to five percent are not sustainable and "are a very tight level" for those markets.
The study indicates that the apartment markets experienced the smallest increase in vacancy rates last year. The average vacancy rate increase across the 54 apartment markets was 1.1%, compared to 4.0% for office, 3.1% for retail, and 1.9% for warehouse. This market is considered the least volatile and predictions are that to reach peak vacancies it will have an expected average increase of 1.1%. The largest increase in the vacancy rate last year were seen in the apartment markets where there is a lot of supply such as Atlanta and Charlotte, and tech markets including Austin, Raleigh, and San Jose.
Not surprisingly, the study notes that the "five office markets that experienced the largest vacancy rate increase last year (Austin, San Francisco, San Jose, Boston, and Raleigh), rank second, third, first, sixth, and fourth, respectively, in their concentrations of employment in the high tech sector." The study attributes the surge in sublease space as the major factor for the rapid increase in rates. As Chesley points out, many companies grabbed space in anticipation of growth only to have to put it on the market when the growth didn't happen. The study specifies that sublease space accounts for about half of the total vacant space in Austin while over nine million sf of sublease space is available in San Francisco because of corporate bankruptcies and consolidations. Many of San Jose's major employers put properties ranging between 400,000 sf to 900,000 sf up for sublease. But the study emphasizes that some of these office markets are closer to their peak vacancy than others. In Boston, the vacancy rate, is expected to rise just 1.4 percentage points before reaching its peak while Austin's is expected to rise by another 3.9 percentage points.
The retail market saw economic vacancy increase by an average of 3.1 percentage points over the last year. This puts that sector behind only the office market in terms of the highest overall increase. But the study points out that the difference in this sector is that most of the "softening" has already occurred. On average, retail vacancies are expected to increase by another 1.2 percentage points. Office and warehouse vacancies are expected to increase by 1.6 and 1.3 percentage points respectively. The five retail markets that had an increase in construction also the largest increase in vacancy rates in 2001. Specifically, the study points to two regional malls being completed in the Raleigh market this year and Wal-Mart, which has aggressively built in Oklahoma City. The aftereffects of the September 11 terror attacks were felt very strongly in Las Vegas which the study notes "has yet to fully recover to pre-9/11 levels."
The warehouse markets experienced the mildest vacancy increase last year of 1.9 percentage points. Again, it's not surprising that three of the five warehouse markets to experience the largest increase last year are tech markets, where demand, the study points out, "has waned significantly."
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