Recession Alters Outlook Rankings

Washington moved up into the top spot from its seventh-place ranking last year, while New York City fell from its No. 2 spot in 2008. Marcus & Millichap cautions in its introduction to the report that the index is not designed to predict the performance of individual investments. "A carefully chosen property in the bottom-ranked market could easily outperform a poor choice in the top-ranked market," the report points out. Second, it notes that the index is geared toward a short-term time horizon. "A market facing difficulties in the near term may provide excellent long-term prospects, and vice versa," it states.

The report also provides background and general outlook for the economy in an introduction signed by Marcus & Millichap president and CEO Harvey Green and Hessam Nadji, managing director of research services. They anticipate that although financial market volatility will dominate the first half of this year, the government's financial initiatives "should start to form a bottom in the second half, setting the stage for modestly positive readings in the latter part of 2010 and a demand-driven recovery beginning in 2011."

Washington's rise to the top spot this year was fueled by an anticipated expansion of the federal government, while New York City's drop to ninth reflects its significant exposure to financial services, which caused and will continue to cause it to record steep employment cuts among office-using tenants. Other cities that dropped in this year's ranking as a result of exposure to financial firms included Boston and Charlotte, which fell five and 13 places respectively.

Although markets with high concentrations of professional and business services and financial activities jobs, such as New York City, San Francisco and Boston, are being significantly affected by the downturn, the Marcus & Millichap report points out that, "These markets entered the downturn with some of the lowest vacancy rates in the country, however, and are largely insulated from overbuilding." As a result, these areas are expected to remain relatively healthy when compared to other metro areas where job losses may be more modest but vacancy is considerably higher.

The office investment market, as in other property sectors, "remains defined by the gap between buyers' and sellers' expectations," the annual office index notes. It points out that cap rates for office properties are forecast to edge higher this year as more motivated sellers scale back their pricing expectations to meet the market. "Average cap rates for all assets will likely exceed 8% in 2009, while properties in certain secondary and tertiary markets are already changing hands with cap rates at 10%," it states.

One of the effects of the slowing velocity of sales has been that values are difficult to establish when so few properties are trading. But as more distressed assets enter the market, "floor-level pricing will become apparent, making it easier to establish values for stabilized properties," according to the report.