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CRE Finance World, Autumn 2012

Through A Sharper Lens: CRE Analysis Using Monthly Data No Sufficient Cause for (Much) Worry… Yet Surprisingly, Office Fundamentals Remain in Recovery Mode Despite the slowdown in absorption and vacancy declines in July, We hinted earlier that a persistent, relevant concern for commercial other signs point to a sector that remains robust. Effective rents real estate is the frustratingly slow pace of economic growth and job grew by 0.3%, a slight dip from last quarter’s monthly average of creation. If there is one sector that should be particularly vulnerable to 0.43%, but well above the monthly average of 0.18% in 2011. moribund job growth, it should be the office sector, where demand Furthermore, any moderation in vacancy compression this year for space is directly tied to the need for employers to house more should not be a surprise. The market is in a very tight position. workers. It turns out, however, that even though job growth slowed Vacancy has not been this low since the wake of the dot-com down markedly after the first quarter’s head fake, office fundamentals boom more than a decade ago and there is paucity of available are continuing to improve. units. As the market tightens and vacancy reaches very low levels, landlords shift their strategy for growing revenue from vacancy The national office market absorbed 2.2 million square feet of space decline to accelerating rent increases. Landlord revenues are still in July, higher than the monthly average of 1.5 million square feet increasing, but are beginning to derive more growth from rent in the second quarter. Vacancies fell by 10 bps, to 17.1%, after hikes than occupancy improvements. remaining moored at 17.2% for four months. Chart 2 Chart 3 Apartment Effective Rent Growth Office Vacancy and Net Absorption Source: Reis, Inc. Source: Reis, Inc. Still, as market participants grow increasingly concerned about Effective rent growth has not been as impressive, rising by only 0.1% how much further apartment fundamentals can improve in the face in July after averaging 0.13% in the preceding six months, but this of grindingly slow economic growth, it seems prudent to examine is well within monthly averages over 2010 and 2011. The recovery as many perspectives as possible, including the latest monthly is lumbering along at a snail’s pace, but it is moving forward. data. If fundamentals are slowing down now, when supply growth remains exceedingly constrained, could the sector sustain further declines in vacancy once a forecasted spike in new construction comes to pass later this year and next? Investors who want to adjust their expectations and projections will be much better prepared if they catch the inflection point earlier. A publication of Autumn issue 2012 sponsored by CRE Finance World Autumn 2012 23


CRE Finance World, Autumn 2012
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