CB Richard Ellis, which tracks a smaller amount of office space in the market than Applied Analysis—approximately 36.1 million sf—shows overall office vacancy at 15.9% as of the end of June. Within that total is 4.8 million sf of class A space that it found to be 14.33% vacant.
While new construction and business contractions related to the residential market are overwhelming the pace of leasing, Charles Moore, a local senior vice president with CBRE tells GlobeSt.com that he expects to see a lot more investment activity in the third and fourth quarters because sellers are beginning to adjust their cap rate expectations, narrowing the bid-ask gap.
One example is Centennial Corporate Center, an office-retail development adjacent to Painted Desert Golf Course that includes 125,952 sf of class A office space, a three-story parking garage and 17,000 sf of service retail completed in 2006. It hit the market several months ago at $54.6 million; today, it can be had for $45 million, not including the $2 million or so that will need to be spent on tenant improvements for the remaining vacant space.
When it came to market, it was expected that the 15% vacancy wouldn't last. Instead it persisted, and the existing tenants—Centex Homes, Plise Development and title and mortgage companies—became less in favor as the residential market continued to deteriorate. The new price, which represents a cap rate of approximately 7%, is an acknowledgement of the time it could take to stabilize the asset, Moore tells GlobeSt.com.
"Consistent with historical trends, the commercial real estate sector lags residential and is impacted by not only the local economic climate, but also regional and national economic conditions. Expansions in professional services have slowed, and companies considering relocation or expansion are being much more cautious and deliberative," says Applied Analysis' Gordon. "As confidence levels begin to report some improvement, the overall employment market firms up and stability in the housing market prevails, corrections within the office real estate market will follow.
"In the interim, property take-backs by lenders are expected to become more common, which will impact pricing, including landlord concessions, going forward. Although ups and downs are not uncommon, the depth of this adjustment has us particularly concerned. We continue to believe in the ripple effect associated with multi-billion dollar investments in the resort and related industries. Timing for many remains the x-factor."
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