SCOTTSDALE, AZ—“Over the past few years we have all heard that the market is in recovery. Proponents of this position continually point at the financial markets and in particular the Dow Jones Industrial Average as the supporting proof of their claim,” says Larry Anweiler, a real estate expert and professor with Kaplan University. “However if we look below the surface we find several indicators that do not support the promising picture being offered to the public.”
A better indication, he says in this exclusive column below, may be commercial real estate vacancy “as these indicators better explain the current recovery or lack of recovery dependent on your viewpoint.”
Larry Anweiler is a professor for the real estate degree program at Kaplan University. The views expressed in this article below are solely those of the author and do not represent the view of Kaplan University or of GlobeSt.com and Real Estate Forum.
What most people do not realize is that the DJIA is a composite of 30 of America's largest corporations. Some companies included in the index include Caterpillar Inc., Coca-Cola, McDonald's Corp., and Microsoft. These companies' no longer restrict their business within US borders, but have extensive operations worldwide including extensive manufacturing operations overseas. Additionally, today these companies report the majority of their income from sales outside the country. This could explain the reason for the jobless recovery as these companies move their manufacturing facilities outside the US to take advantage of less expensive work forces and shipping charges. Also important to note is that these corporations do not employ the majority of America's work force. Most Americans are employed by small and midsized companies doing business within the US.
The collapse of the real estate market starting in 2007 resulted in restricted capital investment in America's small business and medium sized companies that were weakest financially. This loss of active business enterprises caused unemployment opportunities to decrease, and commercial real estate vacancies to increase in local and national markets, as small business owners shuttered their doors due to restricted capital resources and lower customer demand.
In a traditional CRE market 5% to 7% vacancy in considered to be a healthy market. This allows enough inventory for new businesses to find suitable space and does not allow landlords to push up rents drastically. Vacancy rates below 5% usually indicates increased rents but also spurs investment in new CRE building as returns increase for owners. Vacancy rates above 10% indicate excess CRE inventory and force owners who wish to maintain full properties to reduce rents. Value of buildings in these markets declines, which restrict capital investment in new projects, as investors are unwilling to invest in projects that may remain empty.
Today, small business owners are slow in replacing current vacant space. This may be due to a lack of available capital for new business formation, or a persistent concern over new government demands on employers and higher tax liabilities. As reported by Coldwell Banker Real Estate Group Inc. in a report dated April, 8, 2014, CRE vacancy rates among all categories remained above the 10% level for all major CRE groups. In this report office vacancy for the first quarter of 2014 was reported at 14.8%; industrial came in at 11.1%; and retail vacancies were reported at 11.9% nationally.
Watching CRE vacancy rates will prove to be a better indication as to the overall health of the US economy. It will give more insight into true employment opportunities as new business forms and will also indicate new business owner's willingness to invest within current market conditions. CRE vacancy rates should also prove to be a sound leading indicator for those wishing to invest in CRE development or new business formation.
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
