I just read that the U.S. office market recovery has begun:
“…that the third quarter the U.S. office market posted positive net absorption for the second consecutive quarter — 5 million square feet absorbed in the second quarter and 7 million square feet in third quarter.” [U.S. Office Market Enters Early Recovery as Absorption, Demand Point Up, Vacancy Turns Corner].
While these are small numbers, they are welcome moisture to a desiccated market.
In the same digital breath, however, Co-Star’s Group’s 2010 Third Quarter Office Review said that “the national office market won’t begin seeing rental rate increases for another three or four quarters or net operating income increases for another four to six quarters. That means rents won’t start increasing until well into 2011 and net operating income increases will have to wait until 2012.
In the lexicon of Bill Belichick – “that is bulletin board material”.
I think that the experts have it backwards. Surely, office rental rates will remain flat for a while, but it will be far longer than a few quarters. Office buildings in 79 metropolitan areas lost 1.9 million square feet of occupied space in the third quarter or 2010, pushing the national office vacancy rate to 17.5%, the highest level since 1993, or so says Anton Troianovski, of the Wall Street Journal in his October 5th, 2010 article – Signs of Recovery for the Office Market. While economists agree that office vacancies will not reach their record 1992 high of nearly 19%, the recovery will certainly be long and rental rates will remain depressed. I contend that those rental rates will remain well below their high for another two to three years as corporate recovery fills existing shadow space; 2009 and 2010 leases run their fully renegotiated course; employment begins, or struggles, to recover, and the market absorbs what is a massive inventory of newly constructed space. Other factors will contribute to the length of recovery, such as changes in workplace design and the growth in popularity of outsourcing and virtual officing. So, even with the recovery, things look bad for near-term rental rate recovery.
The same is not true for Net Operating Incomes.
The financial downdraft created by the current economy is beginning to change office management attitudes and practices. The advent of long-term negative growth has shifted management focus back to asset quality and condition as well as towards renewed and better capital planning. The commercial property management market has become far more comfortable with the “Cloud” and new technologies it provides have allowed progressive real estate managers to see more, to measure more; to manage more successfully, and marshal assets and resources more economically – more intelligently than ever before. The Cloud makes managers look smarter – be smarter. Improved visibility into property condition and asset-related activities provides management with enhanced decision-making power and greater revenue producing opportunities than ever before – yielding ever-increasing NOI.
The “Moore’s Law” of real estate management is that a real estate manager’s awareness and use of technology is growing exponentially – and from my limited perch, I’ve seen it double year-to-year. The more technology a manager uses, the more visibility that manager achieves. Visibility translates into efficiency which begets dollars per square foot. Better managed buildings with professional systems and automated services keep tenants happier (retention) and attract new tenants to available space. While property management dollars are not necessarily in the same order of magnitude as transactional dollars, they are dollars nonetheless. A dollar saved is another dollar competing for sunlight on the bottom line.
So, I am encouraged by the new focus on management through technology. It is a healthy change for what had become an old and staid market space. Simply said – quarter-to-quarter, clicks are driving bricks and mortar.