Office market fundamentals to spur new growth and... -
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Published on: 7/1/1995
Last Visited: 5/2/2004
"You have to look at both sides of the equation," explains Tom Bakke, senior vice president of marketing and leasing, with Chicago-based Equity Office Properties Inc.
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"Looking at all the available space in downtown Chicago, it is about 18% vacant," explains Bakke, "but if you segment into Class-A product, the vacancy there is only about 13%.So all of a sudden, markets that may have looked very weak from a pure numbers analysis may be much stronger in certain segments."
The same can be true regarding obsolete space in a market."In many of the older CBDs (central business districts) like Chicago and New York, there is a lot of office space that is never going to compete again because to convert the space to a competing level would be more costly than it is worth," says Bakke.
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"You have to remember one key thing, and that is the suburban markets got much uglier than the downtown markets did," says Bakke.
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The better performing CBDs are usually the "24-hour communities," Bakke explains.
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But Bakke is skeptical of the programs' success."Dallas is trying hard to improve, but I think it is going to be tough because they do not have mass transit or residential downtown," he says.
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"For every company that grows in Hartford, two others shrink," says Bakke.
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"These executives are saying, 'why pay $30 in New York when I can move closer to home in Stamford and pay $20?'" says Bakke.
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"In the better product there is hardly anything," says Bakke.Class-A vacancy in the city's CBD at the end of 1994 hovered at 10%, according to GVA Worldwide.
Overall, Cushman & Wakefield reports that both CBD and suburban vacancies in Boston for the first quarter were around 11%.The suburbs were being driven by bio-medical and other high-tech firms."That comes from all of the MIT (Massachusetts Institute of Technology) graduates going out and starting their own firms," says Bakke.
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"The suburbs of Atlanta are very healthy, and I think the Olympics has spawned a lot of optimism," says Bakke.
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"Orlando is becoming the business capital of Florida," says Bakke.
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"It is the capital of Ohio and has the university [Ohio State]," says Bakke."And it is one of the first markets where speculative development has returned."
The rising rents are spurring build-to-suit offers from local developers."We are having trouble keeping tenants in our buildings there because developers are offering to build them buildings and still offer them a lower rate," Bakke adds.
Minneapolis/St.
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"People are saying, 'Why do I need to be in Chicago when I can get the same or better distribution in Indianapolis?'" says Bakke.He points out that both United Parcel Service and United Airlines have developed large warehouse projects in the market, primarily due to its status as a good distribution hub because it has a good highway system and central location.
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"Austin is the state capital and also benefited from the high-tech demand and labor force created by the University of Texas," says Bakke.
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"They are all benefiting from an exodus from California," says Bakke, adding that technology has made corporate moves to these more isolated markets feasible."Communication connections with stock markets and computer networks are allowing companies to operate in more remote locations than ever before," he says.
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"It is about 8% vacant right now," says Bakke, "but again, as a smaller market it is susceptible to quick recoveries and quick down cycles."
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Bakke says the telecommunications industry is driving Denver's most recent wave of growth, as MCI and cable companies have absorbed a large amount of space.
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"Los Angeles was the last major market to hit rock bottom in the real estate industry," says Bakke."Downtown is still struggling but Glendale, Beverly Hills, Westwood and others are turning around."
Bakke says its Pacific Rim connections and the results of NAFTA have been strong for Los Angeles and are playing a large part in the recovery of some submarkets.
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"Palo Alto is as strong as any market anywhere," says Bakke."It is driven by Stanford and the research industry in the area."
South of Los Angeles in San Diego, the suburbs have done well, even though the impact of NAFTA has been minimal to this point."But it should pick up in the future," advises Bakke.
He says the vacancy rate is around 17%, but has dropped 2% in the past year."We are in the Golden Triangle, an area in the suburb of La Hoya, and vacancy is down to 11%," he says.
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