Time flies. Remember the pessimistic pundits who projected that the office market wouldn’t start showing signs of life until 2005? Well, ’05′s right around the corner and we’ve touched bottom. That, at any rate is Alan Pontius’ take on the beleaguered market. Pontius, director of Marcus & Millichap’s national office and industrial properties group, isn’t setting off fireworks yet, but the buzz, he says, is encouraging–especially for markets that have been particularly hard hit–such as Silicon Valley. In a recent, exclusive, interview, Pontius shared his market enthusiasm.

GlobeSt.com: So what’s the good news?

Pontius: The good news is a strong sense that the office market has hit bottom, that we’ve stabilized and are starting to show some level of rebound. It’s been a long time coming. I guess there’s still a caution flag up because the pace of rebound is not exciting, but clearly we’re going in a renewed direction and it’s absolutely the time to start looking. From talking to a number of clients around the country, I know there’s interest in looking and, coincidentally, some of that interest is in markets that are most challenged.

GlobeSt.com: For instance?

Pontius: For instance, Northern California and specifically Silicon Valley.

GlobeSt.com: Is it measurable activity or just talk?

Pontius: There’s some transactional activity but nothing comparable to what you’re seeing in more active markets like Southern California, Florida or Phoenix. So it hasn’t translated into high volume, but I’m speaking more to the investor mode that suggests what markets they should be in as a result of that leasing interest.

GlobeSt.com: So in what terms have we bottomed out?

Pontius: In terms of the pace of leasing activity, in terms of effective rents going down. But let me qualify that. There’s still a substantial population of buildings with rents in place that exceed what re-rent levels would be today. In other words, for a given asset, the rents may not have bottomed out because the rent is already above what it would lease for. But asking rents and vacancy have clearly bottomed out.

GlobeSt.com: To what extent are you panning for fool’s gold here?

Pontius: I don’t profess to be an economics professor, but we’re still getting mixed signals and spenders backing off, and we continue to watch the stock market with some certainty. But on balance, there’s a clear-cut strengthening of profit levels and the overall economy. What has not yet shown up at the level of substance we would all like to see is robust hiring. But small business is coming back strong and those buildings capable of dividing down to smaller uses are likely to outperform the market at large for a number of years. There are two sides to investor interest. On one side is the belief that in areas such as Silicon Valley, when it takes off it moves faster and higher than others. The rents can absolutely explode, driven in large part by new technologies that surge in demand along with all the support technologies. So if the marketplace has realty bottomed, the time to look is now. The second thing driving this interest is the expectation that there could be some opportunistic buys because of its currently distressed environment.

GlobeSt.com: Let’s talk for a minute about industrial trends.

Pontius: The higher-finish industrial product is challenged, including call centers and product geared to the high-tech industry. So from a performance standpoint it gets thrown into the same category as office. It’s had a tough go for the past few years and will face challenges going forward. In terms of the lower-finish industrial, that product type as a general statement is probably in as much demand as any product you could mention, because the balance between supply and demand is far better than office, office/flex or R&D. Plus the exposure to turnover costs is nowhere near the same.

GlobeSt.com: So wrap-up ’05 for both product types—office and industrial.

Pontius: In South Florida; Washington, DC; Orange County; Downtown Los Angeles; Midtown Manhattan; and even Sacramento, we’re already seeing modest gains in effective office rent levels. So in ’05 we’d expect decreasing vacancy, virtually across the board, with flat rents in more troubled areas. But it wouldn’t be a bad time to lock in rates. The bottom line is that you’re still looking at 15% or 16% in the office market. It still has a ways to go. On the industrial; side, we see vacancy declining–among lower-finish environments–to roughly 10%. That’s not bad.

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