Office space has definitely been a laggard in the real estate recover. Having slumped, stalled and then barely moved since the great crash in 2009, office space is showing signs of rising from the ashes and becoming a leader in the commercial real estate market.
According to the international commercial real estate firm, DTZ, office leasers grabbed up 70.2 million square feet in 2014. That kind of demand has not been around since 2006. Moreover rents have increased in 70 percent of major U.S. markets. (source: http://www.rejournals.com/2015/01/09/a-robust-office-sector-numbers-from-dtz-say-its-so/ )
Throughout the commercial real estate spectrum credit conditions are improving. According to a recent email from Trepp, the delinquency rate in commercial real estate loans in commercial mortgage backed securities dropped from 7.43 percent to 5.75 percent year-over-year in Dec. 2014. Fewer and fewer projects in all sectors are teetering.
So what does it all mean? My pal, Peter Fischbach, a commercial broker based in St. Petersburg in the Tampa Bay region thinks we are just seeing the beginning. “These kind of numbers are only interesting at this point to CRE nerds like you and I and a few savvy bankers. I think the trend, especially in office space, is just beginning.”
In spite of recent trends in downsizing due to technology, Fischbach cites the broader megatrends that have ruled the markets for centuries. “It should say this in the bible. In commerical real estate, ‘there is a time for downsizing; there is a time for growth.'”
Allowing more people to work from home, the diminishing need for lots of storage space due to digital storage, word processing displacing secretaries and other advancements have definitely trimmed the need for leased space. Think attorneys.
However, macro economic trends still hold sway. “We have been downsizing since 2007,” said Fischbach. “The trend has turned and will go on for a long time.”
He is seeing construction of new space, but it’s pricey. “In my town, where commercial real estate is generally booming, new office space is a bit more expensive than what is currently available. For example, quality space is available for lease in the mid-20s per square foot. New space is coming on in the low $30s.”
There are always tenants who want the newest and latest in space, he said. It used to be lawyers. “I’m not sure where that crowd is coming from this time around. It’ll be fun to find out.”