Bits Bucket for August 19, 2011

The pattern is this:

1. Economic shock, companies shed people, and space;
2. Real Estate turmoil, distressed properties have basis reset (through foreclosures and/or resale), game of musical chairs as landlords of new cheap buildings attract tenants from their existing space by lowering rents; market rents wind their way down, starting as vacancies are rising, but even in the first part of vacancies falling/occupancy increases;
3. Real Estate recovery, with positive absorption of space, eventually the game of musical chairs slows down as there is less and less vacant space with the positive absorption, rents rise to justify new development, new development occurs.

We are at phase 2/3 right now, with the predominance of markets still in phase 2, but finding a bottom in terms of rents.

Data:

From CoStar, US Industrial market absorbed 32 million square feet in the second quarter, LOWERING vacancy rate to 9.9%.

From CoStar, US Retail market absorbed 11 million square feet in the second quarter; vacancy rate stable at 7.1%.

From Colliers, US Office market absorbed 9.9 million square feet in the second quarter; vacancy rate fell slightly to 15.3%.

Look at commercial property REIT vacancy rates (published quarterly, if not more frequently via special investor presentations). They cover a lot of the country.

A couple of examples:

DDR - Stable occupancy rate for years at about 95% pre-crash, fell to about 90.5% at the worst. Now has clawed it’s way back up to 93%. Rents have risen off the bottom.

FR - Stable occupancy rate was 91/92%, fell to about 81% at worst. Now has clawed its way back to 86%.

Positive absorption of space is a good thing…like the jobs numbers, it means that more space was newly occupied than newly vacated, with the jobs corollary being that more people get jobs than lose them. Only with jobs, you constantly have new people entering the workforce, making the pace of jobs recovery critical to lowering unemployment rates. With buildings, as long as there isn’t appreciable construction, you can lower vacancy rates even with small amounts of positive absorption.

This is an important fact: You can have a commercial real estate recovery WITHOUT a drop in unemployment rate…as long as there is positive job creation, and with it, positive absorption of commercial space, and little new construction.

Unless you believe there to be a vast conspiracy where all public REITs and providers of data are sending out bogus financials, vacancies are falling generally. Industrial is leading the pack, retail is gradually getting better, and office is lagging (no surprise).

I’m not saying that things are wonderful, but gradually getting better. You’ll note that all of my commentary (with the exception of apartments, and Silicon Valley/Inland Empire industrial) is in the future. Over the next 3-5 years, you will see the broad rent growth that I’m talking about…not the next year except in select pockets where vacancy rates have fallen due to local market conditions.

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