CHICAGO—For office markets with strong concentrations of energy or tech tenants, the recovery in demand has been equally strong. Outside of those markets, however, it’s considerably less robust, Albert Lindeman, SVP with Sperry Van Ness, tells GlobeSt.com.
“The coasts are doing very well,” says Lindeman, citing New York City and San Francisco. “When you get into the energy sector, Denver and the Texas markets are growing dramatically.” In secondary markets such as Charlotte as well as Lindeman’s home base of Chicago, the expansion of tech tenants is contributing to growth. “So there are some very good high points, but overall it’s pretty much lackluster.”
How quickly those lackluster markets will acquire some luster is very much dependent ion the local employment numbers, Lindeman says. “If you see the office employment rates increasing in individual markets, you’ll see an increase in absorption” as well as greater appeal to investors.
Although development has been muted, New York City has been a notable exception, given the World Trade Center redevelopment and Related Oxford‘s Hudson Yards mega-project along with construction of individual properties. And there are a few other markets dotted with cranes. “I was in Houston a week ago, and driving by I saw three brand-new, glass office buildings coming out of the ground,” says Lindeman. By contrast, Chicago at the moment has just one large-scale project under development, Hines‘ 45-story tower at 444 W. Lake St. that’s scheduled for completion in 2017.
“Across the tech sector, you’re going to see development in what I would almost call the Smile Belt,” Lindeman says. “It starts in Chattanooga and Raleigh and runs like a smile through Texas and Denver. In that area, you’re going to see some growth. Everywhere else is going to stabilize slowly.”
That rule of thumb will apply to pricing, as well. “Right now, it’s what I would call a top-to-bottom market,” says Lindeman. “You have a lot of quality stuff at the top, and those assets are trading very well. I’ve even heard of cap rates in the 4% or 5% range on the West Coast,” San Francisco in particular.
“Then you’ve got the middle tier: B buildings with high vacancy and not a lot of potential for rent growth,” he says. “And then you have the bottom of the market, where people are buying a vacant building and deciding whether to go for adaptive reuse or rehab it so that when the market comes back, they’ll be properly positioned.” The supply of such assets may be on the rise in local markets, he adds.
SVN’s 10 office markets to watch make that list for a variety of reasons. Charlotte and Chattanooga make the cut for, respectively, a resurgence of the financial services sector there and the Chattanooga government’s proactive investment in a taxpayer-owned fiber-optic infrastructure. Chicago‘s CBD is drawing tenants from the suburbs—a trend that GlobeSt.com has reported in the past couple of years—while Indianapolis benefits from a growing tech cluster.
Milwaukee‘s story is mixed: Northwestern Mutual Life Insurance Co.’s upcoming lakefront development of one million square feet on the one hand, and a high vacancy rate outside of class A on the other. Richmond‘s absorption rate and rising class A rents bear watching, as does the relatively slow recovery of Sacramento, where investment opportunities frequently come with higher cap rates than in other California markets.
Salt Lake City has been a leader in job growth since the recession ended, and that’s being met with a rapidly filling development pipeline that SVN thinks warrants some caution by investors. Stamford, CT landlords have found that tech firms like the mix of advantages this New England market offers, while San Antonio is benefiting from proximity to the Eagle Ford Shale deposits, although its growth is lagging the performance of Dallas and Houston to the north.