Information on 36’ Clear Height Distribution Buildings
square feet were completed in the Inland Empire market area. This compares to
nine buildings totaling 3,562,045 square feet that were completed in the third
There were 11,594,545 square feet of Industrial
space under construction at the end of the fourth quarter 2013.
of the notable 2013 deliveries include: Redlands Distribution Center - Bldg 9,
an 800,444-square-foot facility that delivered in second quarter 2013 and is now
100% leased, and Redlands Business Center Phase II, a 704,115-square-foot
building that delivered in first quarter 2013 and is now 0% occupied.
The largest projects underway at the end of fourth quarter 2013 were
16325 Indian Ave, a 1,560,046-square-foot building with 0% of its space
pre-leased, and I-25 Logistics Center - Bldg 2, a 1,254,620-square-foot facility
that is 100% pre-leased.
Total Industrial inventory in the Inland Empire
market area amounted to 512,934,098 square feet in 12,599 buildings as of the
end of the fourth quarter 2013. The Flex sector consisted of 15,562,718 square
feet in 877 projects. Within the Industrial market there were 1,231
owner-occupied buildings accounting for 83,830,308 square feet of Industrial
This trend is compared to U.S. National Industrial
deliveries and construction, which saw 150 buildings totaling 18.5 million
square feet complete construction, with an additional 98.46 million square feet
of industrial space still under construction at the end of the fourth quarter.
The 1.62 million-square-foot Home Depot Distribution Center delivered in the
Chicago market, while a 2.1 million-square-foot manufacturing building was still
underway in the Phoenix market. Total industrial inventory in the U.S. market
totaled 20.87 billion square feet in almost 615,000 buildings at the end of the
fourth quarter 2013, including almost 68,000 owner-occupied projects.
The information in this news report is based on CoStar’s Fourth
Quarter 2013 Market Report, a 40+ page comprehensive research report available
to CoStar subscribers. To learn more about quarterly research reports and other
benefits available to CoStar subscribers, please call 888-226-7404.
Analyzing such office inventory turnover can provide a good barometer of where office investment dollars are flowing, and also reveal markets that offer opportunities for further investment.
"While overall CRE investment volume rose 14% in 2013 from 2012 levels, office sector activity increased 17% to over $104 billion, the highest annual volume recorded for the four major property types,” said Nancy Muscatello, senior real estate economist with CoStar Group.
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"Although last year’s haul was still shy of the peak office investment levels we saw in 2007, it does demonstrate the return of strong investor interest in office property, although that wasn’t necessarily the case everywhere.”
Looking at office inventory turnover trends across the top 54 U.S. office markets, five Southern and Western markets saw more 10% or more of their total office market inventory change hands last year: Austin, Dallas/Fort Worth, Atlanta, Houston and Denver. Austin was especially popular with office investors as 13% of its office space was acquired by new owners in 2013.
Six office markets saw just 3% or less of their stock change hands: Long Island, Sacramento, Baltimore, Pittsburgh, Honolulu and Richmond, which posted the lowest turnover of 2%.
The surge in transaction volume in many of these markets was predictable, Muscatello said.
"Houston is a shiny object that investors cannot seem to get enough of, offering a bulletproof demand story and fairly decent yields," as a result trading volume has soared in some key submarkets, she said.
“Austin has also been on the radar of investors for quite some time. The metro had a huge inventory turnover in 2013 (13.1% of inventory,) although a sizable portion of that (40%) was due to portfolio sales,” Muscatello noted. The biggest portfolio to trade hands last year in Austin was the sale of the Thomas Properties Group portfolio of five trophy CBD towers as part of the firm’s acquisition by Parkway Properties.
"With a large chunk of the CBD inventory having already traded in this market, I would expect sales to remain strong, but turnover rates to moderate in the near term," Muscatello added.
Chris Hightower, an investment broker with Marcus & Millichap in Austin, said the ownership changes demonstrate the evolution of the Austin market. Historically, big institutional buyers have eschewed the ‘Live Music Capital of the World’ due to its relatively small size compared to major markets.
“However Austin has become real estate darling due to the hard charging Austin economy,” Hightower said.
Meanwhile, some of the nation’s core coastal markets saw relatively lower inventory turnover, including Washington, DC, San Francisco and New York, where just 5% of inventory traded hands. As a way of comparison, the average across the top 54 U.S. office markets was 6.33% turnover.
"Of course, that’s due in part to the size of those markets,” Muscatello noted. “Not only were they at the forefront of investment activity early in the recovery, but markets like New York and Washington DC have office inventories that are much larger than the average market. Investment volume in New York for example, still accounted for 23% of all office sales in 2013, even though New York’s share of the office inventory is only 10%. San Francisco also pulled in an outsized share of sales volume in 2013.”
Andrea Cross, national office research manager for Colliers International, also noted the turnover trend in the gateway markets.
“New York, San Francisco and Boston experienced the strongest demand from investors coming out of the recession, so many office assets in those markets have already traded. Lower inventory turnover in 2013 is attributable to a shortage of available assets and strong price increases in recent years rather than a lack of interest in those markets,” Cross said.
It’s not so much that investor interest has waned in those markets, but rather it has expanded to include others.
“Office turnover in markets outside of the core gateway markets has picked up with broader economic growth and higher investor confidence in the office market’s recovery,” Cross said. “We are seeing higher turnover in many markets that were out of favor earlier in the recovery.”
Markets such as Nashville, Jacksonville, New Orleans and Las Vegas all saw 8% turnover in office inventory last year, according to CoStar data.
“Office sales volume is certainly on the rise in secondary markets as the recovery spreads to more markets and investors move out on the risk spectrum in search of higher yields,” Muscatello said.
Just Leased: 77,597/SF Freestanding Industrial/Manufacturing Plant in Rancho Cucamonga. Noah Samarin represented US Specialty Vehicles, Inc., in their long-term lease of its new corporate headquarters and manufacturing facility. US Specialty Vehicles, Inc is a manufacturer and distributor of custom exotic and specialty vehicles to the international consumer markets.
Just Listed for Sale: 5,862/SF Freestanding Commercial/Retail/Industrial building in Upland, CA. Call for pricing and details.
Just leased: Noah Samarin represented both the owner, MK Hammer Co., and the tenant, Electric Vehicles International, LLC in the leasing of this freestanding commercial/industrial building in San Bernardino California
Ontario Airport Business Park Trades for $8.6M
Noah Samarin will handle the leasing for the park for Rexford Industrial.
The portfolio is a five-building, multi-tenant business park totaling a little more than 113,600 square feet located adjacent to the Ontario Airport. The park is currently 95 percent occupied.
Rexford used the proceeds from its $10.1 million sale of Kaiser, a 124,640-square-foot industrial property in San Diego, CA back in January in a tax-deferred 1031 exchange
The upbeat performance was driven by relatively steady economic growth and job gains of 2.3 million or 1.7% in 2013. During the year, expanding businesses accounted for the highest aggregate net absorption across all four major commercial property types since the recovery began.
The increased demand for space, coupled with continued low construction levels (except for the multifamily property sector, which saw a notable increase in construction), vacancy rates fell across most markets at year-end 2013 from one year earlier, and the national avaerage vacancy rate reached new cyclical lows in both the apartment and industrial sectors over the last year.
Rents Trending Up as Vacancy DeclinesThe CCRSI report found that improving market fundamentals is beginning to tilt pricing power in the favor of landlords.
In the apartment sector, rents have increased an average of 14% from the trough of the latest cycle, with more modest rent increases of near 6% in the office and industrial segments since those sectors bottomed out in late 2010/early 2011.
Even the beleaguered retail property sector, which experienced rent losses into 2012, saw a turnaround last year, with retail rents growing a modest 1.9% in 2013.
Investor demand for all commercial property types also remained strong, as overall sales volume increased 16% from 2012.
The two broadest measures of commercial property pricing in the CCRSI, the U.S. value-weighted index and U.S. equal-weighted index, each posted strong gains of 11.2% and 7.6%, respectively, in 2013.
Reflecting the stronger price appreciation of larger properties in core markets, pricing in the value-weighted index has now risen to within 5.5% below the previous peak level set in 2007. Meanwhile, the equal-weighted index, which is more heavily influenced by smaller transactions, is still 25% below the prior peak. According to the CCRSI, this suggests that there is plenty of room left in the recovery for price appreciation in lower-end properties and those located in secondary markets, as the recovery continues and investors expand their focus scross more markets.
Price Growth Extends to Include All Property TypesThe Multifamily Index was again the leader of the pack, driven by a higher availability of debt financing and strong investor interest in buying leased apartment properties in established markets such as New York, Washington, DC, Boston and San Francisco. The CCRSI Multifamily Index rose 36% over the last three years, more than doubling the gains in other property types during that timeframe.
Most U.S. apartment markets are now in the expansionary phase of the cycle, in which new construction begins to impact occupancy levels and rent growth. The Multifamily Index increased by 7% in 2013, amid stronger gains of 14.1% in the retail sector and 8.9% in the office sector, while pricing in the industrial segment gained 5.9% for the year.
December Transaction Activity Caps Busy Property Sales YearContinuing the seasonal sales pattern seen over the last several years, commercial real estate transaction activity spiked in the final month of the year as investors rushed to close deals prior to year-end. This year-end increase lifted the total number of repeat sales recorded in 2013 to a record high of nearly 15,000, an increase of 11.2% from 2012’s total.
Both the investment grade and general commercial segments of the Index were heavily traded as improving market fundamentals and higher yields available in commercial property relative to other asset classes continued to fuel strong investor interest.
However, the CCRSI also noted the spread between cap rates in core markets and the risk-free rate has narrowed substantially over the last year. This, along with an expected rise in interest rates over the near term, suggests that investors will continue to look for yield in secondary markets and property types, according to the report.
Editor’s Note: More detailed analysis of property pricing trends, including by major property type and region, is available in the complete CCRSI report available here.
"While 2008 through 2011 was largely an ‘era of acquisition’ in which lucrative opportunities were abundant for anyone with available capital, we are now in an ‘era of execution,’ in which investors must create value and execute strategically to achieve attractive risk-adjusted returns," according to P.J. Yeatman and Jeffrey Reder, private real estate executives for CenterSquare (formerly Urdang Capital Management).
Since 2009, investors have largely flocked to acquire stabilized core assets to the point that Yeatman and Reder believe current yield is now overbought and total return assets are relatively underpriced.
With improving fundamentals spreading across more markets, the real estate cycle has reached a point where investors can create arbitrage from the “mispriced perception of risk” that exists between stabilized core and value added assets, the CenterSquare executives said.
"Due to the combination of a high cost basis and a lack of opportunity for increased yield, stabilized core assets carry greater risk than is currently perceived," Reder and Yeatman wrote. "In contrast, transitional value-add assets can be acquired at an attractive cost basis in today’s market because they are perceived to carry greater risk."
In reality, cost advantages created through redevelopment provide superior downside protection and less actual risk, they said, adding that acquiring middle-market assets through a value-add strategy now “represents the best opportunity for creating value and reducing risk.”
CoStar transaction and analytical data bears out the investment market shift. Core properties in major markets have now risen to within 5.5% of their previous 2007 peak, while pricing in smaller transactions is still 25% below the prior peak, leaving a longer runway for price appreciation and yield in secondary markets and lower end properties, according to the most recent CoStar Commercial Repeat Sale Index (CCRSI).
The spread between capitalization rates in core markets and the risk-free interest rate has narrowed over the last year, and with rates projected to rise, investors will likely search for yield by acquiring and adding value through repositioning in secondary assets and properties in second-tier market.
Rise Of the Value-Add FundsWhile core property investment is still of keen interest to investors, higher risk strategies are now getting more attention and have dominated capital fundraising over the last year. As of January 2014, there were 451 closed-end private real estate funds in the market targeting $151 billion, of which 64% of the funds are following either an opportunistic or value-added strategy, according to private-equity research firm Prequin.
Opportunistic funds accounted for 46% of all raised capital with 54 funds raising $35 billion over the last year, while 50 value-added funds closed after raising an aggregate $16 billion, according to Prequin.
"We will see more and more value add deals," said Martin McDermott, a Los Angeles-based investment broker with Avison Young specializing in value-added office, retail and apartment sales. "In certain constrained markets, there just isn’t much product in the market, and the prices for that property have gone up."
"Savvy investors who have been around for a couple of cycles are looking at what’s on the market," McDermott added. "If they feel that all the future value has already been priced into a deal, they would rather buy a property that has a delta between the cost of purchase, carrying and renovation costs, and how much rent they can charge by renovating and putting it back on the market."
In L.A.’s hot Westside, for example, the rising demand for low-rise collaborative office space from creative-focused entertainment, design and software companies is resulting in opportunities for investors and developers with enough market knowledge to scoop up and reposition older Class B and C office buildings.
No textbook can adequately describe the traits that will make any particular value-added transaction pencil out, McDermott said.
“Value add attracts a certain type of office, retail or apartment investor or developer, one who is incredibly astute and in tune with the local market needs,” he said. “It flexes their real estate experience. Investors are looking at local market information, factoring in the cost of construction and the process, and determining whether they see a higher and better use than what currently exists.”
Where to Buy RiskWith office occupancy now recovering at a brisk pace, the second half of the recovery is bringing growth in rental rates, net operating income and property values for investors. Demand is especially acute for suburban office markets such as San Jose, CA and Cambridge, MA, the traditional domiciles for fast-growing tech and life science companies, CoStar data shows.
Even as prices in CBD office markets have accelerated in some cases to bubble era levels, the growth of downtown focused tenants such as government, law firms and financial services hasn’t kept pace. Value-added funds have patiently stocked up on capital for this portion of the recovery.
Some office submarkets are already white-hot, with sales activity in 2013 surpassing previous historical highs. For example, the Denver CBD, downtown Nashville, Boston’s Burlington/Woburn submarket, and several areas in Houston have all had more than 15% of their office inventory trade over the last year — more than three times the national office inventory turnover rate in 2013, according to an analysis by Property & Portfolio Research, a CoStar company.
As capital chased demand into secondary locations in good markets last year, the vacancy rates in downtown Denver, Boston’s Burlington/Woburn, and Houston’s Westchase submarkets fell to below 10%. While most of the trades were for well-occupied properties, a notable minority had significant vacancy issues as value plays - but with rents rising, it makes sense take leasing risk in these locations, according to the PPR analysis.
An example of a classic value-added transaction in a growing metro with plenty of leasing upside was the sale early this year of the Panorama Corporate Center in Englewood, CO, comprised of seven office buildings totaling 821,242 square feet for $145.3 million, or $174 per square foot.
A joint venture of Equity Office and institutional investors advised by J.P. Morgan Asset Management sold the properties to Miller Global Properties, LLC in a transaction that closed Jan. 6. The deal for the property located near the Dry Creek light-rail station included two additional development parcels totaling 11.3 acres, zoned for any combination of office, retail, industrial or residential uses.
The industrial and multifamily markets are also seeing a rising tide of repositioning plays. AEW Capital Management recently formed a joint venture with Sealy & Co. in Dallas to acquire industrial assets in the Southwest and Southeast, making an investment out of the gate in a 20-building industrial portfolio in Texas and an industrial property in Atlanta.