Commercial Property News - November 2008 - (Page 20)

CPN’s Top Cities Target Practice By Eugene Gilligan Investors, Corporations Move Cautiously T he credit crunch that continues to hold the U.S. economy in its grip has caused both commercial real estate investors and corporate space users to adjust their approaches in the search for new locations. Investment, of course, has declined significantly as worries about the economy, tightened lending and a pricing disconnect between potential buyers and sellers have greatly slowed transaction flow. Many investors are focusing on major gateway, 24-hour cities, viewing them as a safe haven for investment, according to Hessam Nadji, managing director of research services for Marcus & Millichap Real Estate Investment Services Inc.Although property values have declined across the board, they have fallen less on core assets in major markets than on properties in secondary and tertiary locations. Cap rates have risen 75 to 100 basis points in secondary markets and 100 to 200 basis points in tertiary markets versus an average across all markets of 25 to 50 basis points. (See “Safe Harbor” on page 18 for investors’ other current focuses.) Corporations are also delaying decisions, and while many executives still want their location choices to achieve long-term economic benefits and provide pools of available employees, firms are increasingly concerned about the immediate costs of moving any part of their businesses. Investment Three-Legged Stool The month of September could well come to be viewed as a major demarcation for U.S. commercial real estate investment in 2008. The bankruptcy of investment banking giant Lehman Brothers Inc.and the takeover of Merrill Lynch & Co. by Bank of America Corp. raised enormous questions about the impact on many cities’ economies caused by deep cuts in financial services employment. Six percent of the U.S. workforce is now employed in financial services, according to Nadji.The high of 6.2 percent came in 2003. He cautioned that if employment drops to the low of 5.8 percent, set during the fourth quarter of 2000, the financial services sector FLIGHT TO QUALITY will lose 225,000 more jobs than (average cap rates of apartment, retail, office and had been tallied by the end of the industrial properties of $5 million and greater) third quarter of this year. 9% New York City, not surprisingPrimary Markets ly, houses a disproportionate 8% Secondary Markets share—11 percent—of the Tertiary Markets financial services workforce. 8% Jacksonville, Fla., comes in next 7% with 9.5 percent, Nadji reported. New York City’s finance base 7% will likely make many investors skittish about its commercial 6% 1 3 1 3 3 1 3 1 3 1Q real estate assets; the financial 04 Q 04 Q 05 Q 05 Q 06 Q 06 Q 07 Q 07 Q 08 Q 08* sector implosion surely will *estimate increase Manhattan office vacanSources: Marcus & Millichap Reeal Estate Investment Services Inc cy rates, but rising unemploy& Real Capital Analytics Inc. ment in the sector and the evaporation of megabonuses for Wall Street execunation’s capital remains seemingly impervious tives could cause unpleasant side effects for to market cycles, Liantonio said.And Seattle has the retail and multi-family sectors, as well. what Jim Costello, principal & director of fore20 COMMERCIAL PROPERTY NEWS • November 2008 • www.cpnonline.com Cap Rate In fact, worries about the ripple effect of the financial sector’s meltdown dropped New York City from first to fourth place among markets favored by investors who were surveyed for this year’s Emerging Trends in Real Estate,published by the Urban Land Institute and PricewaterhouseCoopers. However, Frank Liantonio, executive vice president of global capital markets for Cushman & Wakefield Inc.,believes that New York City “is still an attractive place to be.” Major global retailers still want to have a presence in Manhattan, he noted, and the hotel sector will continue to enjoy a boost from foreign tourists eager to take advantage of the weak dollar. Outranking New York City in the survey are Seattle, San Francisco and Washington, D.C.The casting for CB Richard Ellis Inc./Torto Wheaton Research, called “a threelegged stool”of employment drivers that should enable it to weather economic downturns better than many major metropolitan areas. The market’s strong manufacturing center owes in large part to the presence of The Boeing Co. Additionally, Microsoft Corp. heads the city’s vibrant roster of technology employers, and the significant presence of Washington Mutual Inc. has—to date, at least—boosted the central business district. Even if JPMorgan Chase & Co.’s absorption of the bank diminishes its role in the market, “you still have two of the other legs,” Costello said. His “one-horse towns,” on the other hand, occupy more precarious positions.For example, the back-office functions of many subprime mortgage companies occupy a large amount of Ventura County,Calif.’s office space,and the market has taken a beating since those companies became unglued. Emerging Trends respondents complimented Seattle’s diverse lineup of cutting-edge corporate tenants.There are, of course, hurdles: Downsizing within Washington Mutual and Starbucks Corp. may hurt the office market, 3.5 million square feet of new office supply is set to come online and the condominium sector has softened significantly. Still, investors gave a thumbsup to the apartment sector, betting on lower vacancies and rising rents to accompany a limited pipeline of new supply. Respondents also said low shopping center vacancy should help the retail sector perform reasonably well, and they ranked industrial product around the Puget Sound ports top in the United States. http://www.cpnonline.com

Table of Contents for the Digital Edition of Commercial Property News - November 2008

CPN - November 2008
Contents
Starting Line
Buzzyworthy
Seniors Housing
Data/Analysis
Conferences
Through the Fog
CPN’s Top Cities for Investment & Corporate Relocation
Finance
International
Sustainability
CPN-Nielsen Claritas Special Report

Commercial Property News - November 2008