The Expert: Five-Year Horizon

As the economic gales continue to blow, do any U.S. office markets offer a port in the storm? The short answer is, ‘Not really.’ Vacancy fell modestly last year in an eclectic mix of eight markets, led by Greenville, S.C.; Wichita, Kan.; and Pittsburgh. However, even these holdouts are unlikely to escape the floodwater in 2009.Beyond the current turmoil, which markets are likely to offer the best five-year investment outlook? Every year Grubb & Ellis Co. ranks major markets against a set of criteria important to the performance of office properties, including economic indicators like job growth, demographic indicators like population growth and education and real estate indicators like vacancy rates, absorption, construction, rent growth, cap rates and barriers to entry. This analysis does not consider the objectives, strategies and return targets of specific investors, nor does it consider differences in performance by submarket, which can vary greatly within a particular metropolitan area. The analysis is meant to highlight markets that offer the potential for good investment returns, whether debt or equity, over a five-year horizon and that may warrant further attention by investors.For office investors, Washington, D.C., took top honors in the rankings this year. The expansion of government authority over the financial industry alone will propel leasing activity through the recession. West Coast markets—Portland, Ore., Los Angeles and San Francisco—occupy the second through fourth positions and Oakland/East Bay takes the 10th spot. These markets benefit from diverse economies, educated workforces and high barriers to entry.In economic structure, No. 5 Austin has more in common with No. 8 Raleigh-Durham, N.C., and ninth-ranked Boston than with its larger Texas neighbors, No. 6 Dallas-Fort Worth and No. 7 Houston. Austin, Raleigh and Boston are state capitals graced with leading universities and technology industries, and the two larger Texas metropolitan areas, particularly Houston, will benefit from their rapidly expanding workforces and energy-driven economies when global demand begins to grow again.While none of these markets are immune to the current economic storms, they should be among the first to recover when calmer seas return.