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NAIOP's Vital Signs Survey:
The Economy May Be Brightening,
But Where's Demand?
Office Market
Cycle Forecast
Projections show the office market moving to a recovery phase by the end of the fourth quarter 2002, based on a combination of future demand and supply estimates. Demand forecast is based on an estimate of GDP growth
of 2.3% for 2002, while the supply side looks at both starts and completions for the year. It is estimated that starts will be down over 50% from 2001 levels, but as completions lag behind starts by one to two years, the drop for completions
is estimated to be only 20%. The rental growth estimate for 2002 continues to be flat to down, as much as 10%
in some markets.
(Source: Glenn Mueller, Ph.D. Copies of the complete report can be ordered by e-mailing grmueller@leggmason.com.) |
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The economy is clearly on the mend, but it will be some time before the nation's industrial and office markets are back on track. That's the general sense expressed by members of the NAIOP Forums in the third semi-annual Vital Signs Survey.*
Some highlights:
The economic outlook is brightening.
Only a fifth of respondents feel the national economy is still in recession; after September 11th , 85 percent felt so. A quarter of respondents feel the economy is growing—none felt so this past Fall. The most positive feelings about the nation are in the Midwest, which was one of the regions to first feel the downturn.
Local economies are lagging the national perception.
A year ago, virtually no respondents said their local economy was in recession; today over a fourth still feel a local downturn while less than a fifth see growth. NAIOP members may be waiting for an uptick in local real estate activity before they sense the recovery is real. |
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The West remains the gloomiest region.
Nearly 40 percent of respondents in the Pacific and Mountain states feel their region is in recession. In the other regions, a majority of respondents feel the local economy is at least flat, if not expanding yet.
The investment outlook has improved.
Over 70 percent of respondents say REITs will appreciate over the next six months; only a quarter felt so in both the Spring and Fall of last year. A fifth see the Dow topping 11,000 in six months, almost no one did, post-September 11th. After the attacks, nearly everyone's mood was gloomy, nearly all members thought the Dow would be below 10,000 by March 2002. |
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Friendly or "Hostile:"
How Does Your State Rank on Small Business?The Small Business Survival Committee, a nonprofit small business advocacy group based in Washington, DC, recently issued its annual state rankings scorecard. The scorecard is calculated using the results of 12 key Congressional votes on issues affecting small business, such as the tax cut, health insurance and energy.Using an average of House and Senate scores in each state, the SBSC ranked the top 10 states where voting favored small business. A positive attitude toward small business can encourage economic development and lead to office and industrial development opportunities. Is your home state on
the list? The complete report, including all 50 state rankings and voting by Congressional Member, can be found at www.sbsc.org.
(Source: Small Business Survival Committee)
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Real estate business and borrowing prospects are picking up.
Is business better, the same or worse? Respondents are fairly evenly divided between the three. But this is a big improvement from post September 11th, when 60 percent said things were worse, and a year ago, when half felt so. Also, despite low interest rates, few members feel borrowing is easier today than six months ago, but nearly half say it's no more difficult.
Fewer cranes are on the horizon.
The majority of respondents indicate the development potential for office and R&D/flex is poor and nearly everyone is gloomy about telecom hotels. Warehouse/distribution has the most positive outlook, but even it's weaker than six months ago.
Investment is more promising than development.
The outlook for real estate investment is generally positive, although, despite an economic rebound and high going-in cap rates, it hasn't picked up appreciably over the past six months. Few respondents see a compelling reason for telecom hotel investment.
Rents are down, but should stabilize.
Nearly three-fifths of respondents say industrial rents are down over the past six months, and nearly 80 percent say office rates have taken a hit, both far worse than the consensus than six months ago. But a brighter economic picture makes respondents more optimistic about future industrial and office rents. |
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Activity is trending toward build-to-suit.
A year ago, only one-third of respondents indicated that build-to-suits were the most active segment of industrial development; it's now up to 44 percent. In office, one-fourth of the members say build-to-suits are the most active, up from one in seven a year ago.
Development costs are taking a breather.
The vast majority of respondents say land, steel, concrete, sheetrock and labor costs are flat to down. A year ago at least a third felt each of these components was going up.
Economic recovery hasn't dampened demand concerns.
By far the biggest threat to the health of the nation's industrial and office markets is the economy/demand, essentially unchanged from six months ago. Overbuilding placed a distant second, and regulatory constraints/financing issues fade in importance in today's environment. |
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Energy remains a marginal issue.
Only 12 percent of respondents are highly concerned about energy availability/cost; over half say it's not an issue. The notable exception is in the Pacific/California region, where 90 percent of respondents are somewhat or highly concerned about energy.
Building security causes widespread concern.
Nearly two-thirds of respondents expressed concern with the issue, which the greatest sensitivity in the Northeast. Only in the Mountain states and Canada was it deemed a non-issue.
Terrorism continues to plague the investment and financing markets.
Nearly three-quarters of respondents are somewhat or very concerned with the availability/cost of terrorism insurance. Again, the problem is more acute in the Northeast than in the Mountain states and Canada, but nowhere is it a non-issue.
*Note: NAIOP's Spring 2002 Vital Signs Survey was conducted in March. The last full survey was taken in early September 2001, although key questions were re-polled following the September 11th tragedies.
By Doug Herzbrun, Managing Director, CB Richard Ellis Investors
Is It Over Yet?
"Choppy Waters Ahead,"
Says Real Estate
Research Corporation
The RERC Real Estate Report warns that, in spite of more positive economic news, the outlook for commercial real estate remains unpredictable. The effects of the Sept. 11 attacks as well as the months-long lag in the economy have had a negative impact on commercial real estate that RERC analysts foresee continuing until 2003.The uncertainty of terrorism insurance and security measures combined with high vacancy rates and increasing sublease space have turned the smooth ride of real estate
into a storm-tossed adventure.
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In our quarterly look at economic statistics that impact your business, we're revisiting some of the trends we first tracked in January 2002. With the recent news about the end of the recession (or the recession that never was, depending on which story you read), we invite you to take a look at the most recent economic data and decide for yourself.
Business bankruptcies, usually an accurate indicator of the state of the economy, were up in 2001 from 2000's year-end total (35,472), but down considerably from the total for 1991 (71,549).
| Temporary staffing employment remained level throughout 2001, peaking at slightly more than 2.2 million (average daily employment) in the first quarter. However, the numbers are down more than 15% from year-end 2000 totals. |
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| And finally, the PMI, that magical composite index based on seasonally adjusted numbers for five categories (New Orders, Production, Supplier Deliveries, Inventories and Employment) currently stands at 54.7.
A PMI reading above 50 percent indicates that the manufacturing economy is generally expanding. While the monthly index for 2001 is a bit of a roller-coaster ride, the PMI for February 2002 shows a strong, positive trend. Is this the real indication of better times ahead? |
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First Look:
By Sheila K. Vertino, NAIOP vice president for Information and Research, and Anne Simpson Prior, NAIOP manager of Information Services. |
