To compile the forecast, Grubb & Ellis ranked 50 metropolitan areas according to their performance against a list of 18 demographic, economic and real estate criteria. Key leasing market indicators such as absorption, vacancy and rent are improving, but the pace of the recovery will be slow and geographically uneven, the office report states. The vacancy rate, which fell by less than one percentage point during 2004, is unlikely to drop any faster than two percentage points annually during the next few years, which means that the rule-of-thumb equilibrium vacancy level of 10% remains three to four years in the future.
All four major southern California markets--Los Angeles, Riverside-San Bernardino, Orange County and San Diego--won places on the list thanks to surging population growth; economies fueled by global trade, defense, biotech and other promising employment sectors; and severe development constraints. Two south Florida metros, Broward County--Fort Lauderdale--and Palm Beach County made the list largely for the same reasons.
New York and its New Jersey suburbs, which are generating jobs again at a healthy pace, occupy the ninth and fourth positions, respectively. Rounding out the list is Las Vegas, with the developmentally similar Phoenix market, which occupies the 11th spot. "New York and New Jersey are out of the gate with jobs creation," Bach says. "And financial services are hiring again. It's moving forward."
One city that's not doing well at all is Pittsburgh, which is a rarity in that its younger residents are leaving the area. Many other markets will continue to struggle with widespread oversupplies of space including Chicago, Atlanta, Dallas and Houston, although the two Texas markets each absorbed nearly one million sf in the third quarter of 2004.
When it comes to the upcoming presidential election, he says a key issue to the administration will be reducing the deficit, which would be good for the real estate industry. "Anyone in real estate should keep an eye on the deficit," Bach continues. Regardless of who occupies the White House in the next four years, the DC metro area should continue to flourish over the next five years, Bach points out, due to the continued growth of professional associations, lobbyists, legal firms and other private employers that need to be near the seat of power.
Of the four core property types, retail is the strongest in terms of tenant demand, according to G&E. Consumers went on a spending spree through the 1990's, the longest economic expansion in US history. They kept on spending through the recession of 2001 and the jobless recovery of 2002 and 2003. Over the past 12 months, institutional-grade retail properties tracked by the National Council of Real Estate Investment Fiduciaries, the organization representing pension funds and their advisors, far-outpaced office, industrial and apartment investment returns.
Through the first three quarters of 2004, apartment investment transactions totaled $30.3 billion, already surpassing the full-year total of $29.3 billion in 2003, according to Real Capital Analytics. Demand for industrial space among tenants and owner-users outpaced supply in 2004 by a wide margin, which drove the vacancy rate lower for the first time since 2000, Grubb statistics point out.
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