Recovery Returns to Core Metros, Five Years Off for Others

While there were a lot of positive moves in the country’s strongest office markets during 2011, the smaller cities will likely have to wait a few years to see their recoveries.

While it seems clear that multi-family will see the most active investment in 2012 – a recent poll by Commercial Property Executive saw 65 percent of respondents choosing that sector as the one that will see the most capital in the new year – there are solid arguments to make for the office landscape as well. “My guess is that, in 2012, we’ll see other product types in the mix,” Ken McCarthy, senior economist at Cushman & Wakefield Inc., told CPE, “as leasing fundamentals improve and with no construction in the pipeline.”

And while interest for the upcoming year will likely be focused on high-value markets, such as New York City and Washington, D.C., the harder-hit cities will likely get their time to shine some years down the road. “In 2011,” McCarthy said, “investors went back to core metros.”

The lead research analysts for CBRE Group Inc. found that locality will play a large role in the investment volume as well. As they noted in a year-end report, there will likely be a slowdown in in-place rents for many cities across the country due to sub-normal economic growth and slow recovery in fundamentals. While “it is not clear how widespread this issue is,” the report noted, “it depends on the lease-term length customary in a given local market.”

And, as McCarthy mentioned, many of those cities showing unsure growth are outside of the core metros. A report by NAI Horizon on the Phoenix office market shows that McCarthy’s assertion may be looking in the right direction. “As we enter 2012,” the fourth-quarter report noted, “a new attitude is taking hold. Though conditions remain weak, 2011 saw an increase in in-migration population and new-job creation, creating optimism about improvement in this sector.” Sales transactions for the city’s office market dropped as a three-year run of increased unemployment, corporate contractions and a flight to quality – which left many spaces unoccupied – battered the Phoenix area. With the modest gains in occupancy and absorption numbers at the end of 2011, however, things could possibly be turning around.

The picture is very similar in Atlanta. According to Cushman’s research, the city’s third quarter was marked by slowed momentum in the office sector, with year-to-date leasing activity in 2011 down 3 percent from the previous spot in 2010, reaching just 7 million square feet. And the flight to quality was a real factor as well. “Not surprisingly, tenants, when able, continued to trade up, moving from Class B and C product into Class A product at attractive pricing,” a report noted.

So what does that five- to seven-year timeline hold? “Those Southern cities that boomed in the early 2000s will take a little longer to digest,” McCarthy said. “Cities like Atlanta, Houston, Phoenix and Dallas will see a recovery in five or six years.”