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CRE Finance World, Winter 2013

Office Vacancies and Efficient Space Use Chart 2 Higher Vacancies Could Slow Rent Growth and Weaken Office Vacancy Rate (1985-2011)* DSCRs and NOI To test the potential effect of higher office vacancies on rents, NOI, and DSCRs, we regressed rents on vacancies using CBRE-EA data from 1985-2011. We found that rents moved in response to vacancies, with a two-year lag. Based on our scenarios, reductions in office space per person may limit 2011-2017 rent growth or even result in a decline (see Table 2). In the scenario of sq. ft. per person usage dropping 10% from the current level, we estimated that rents would fall by 3% instead of rising 13.4% in the CBRE baseline. Table 2 Rent Growth Using Regression Analysis * The Standard & Poor’s scenarios displayed in the chart reflect projections for 2017; we interpolated the results for 2012–2016 between the 2011 and 2017 data points. Sources: CBRE Econometric Advisors and Standard & Poor’s. LT — Long-term. *To calculate the predicted percentage change in the rental index from 2011–2017, we use the CBRE projects growth in office-using employment and construction 2011 rent index that the regression predicts, not the actual value. over the next five years, but a reduction in office space per person Sources: CBRE-EA and Standard & Poor’s. CBRE-EA — CBRE Econometric Advisors. could have a detrimental effect on the vacancy rate. Under the CBRE baseline forecast, the vacancy rate falls to 12.8% by 2017. We believe the effect of higher vacancies and lower rent growth The baseline results in a decline in space usage per person of 4%, could weaken property-level NOI and loan DSCRs (see Table 3). but it remains 3% above the long-term average. The weighted average DSCR of 2011 vintage loans on a sample office loan rises from a starting point of 1.20 to 1.41 under the If the average sq. ft. usage per employee returns to the long-term CBRE baseline scenario but falls to 1.13 if office use efficiency average, the vacancy rate would be 2.4 percentage points higher, rises by 10% from the current level. If sq. ft. office use per person all else equal. With more firms looking to increase office use falls 10% below the long-term average, the weighted-average efficiency, the average sq. ft. usage per worker could fall even DSCR falls below 1.0 based on our rent regression estimates. further, in our estimate. If the average usage drops 10% below the current number — to 195 sq. ft. /worker — the office vacancy rate Table 3 would be 5.3 percentage points higher than the baseline forecast NOI/DSCR Results Using Selected Scenarios And A Sample Office Property/Loan by 2017. In our most pessimistic scenario for office demand, per worker use falls to 10% below the long-term average, resulting in a vacancy rate of 24%. Table 1 Future Vacancy Rate Using Selected Scenarios Sources: CBRE Econometric Advisors and Standard & Poor’s. NOI — Net operating income. DSCR — Debt service coverage ratio. CRE Finance World Winter 2013 50


CRE Finance World, Winter 2013
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