A local firm has released a report predicting more real estate jobs in Boston.
Grubb & Ellis Company (NYSE: GBE), a leading real estate services and investment firm, today released its 2011 Real Estate Forecast, which foresees the start of a slow recovery in the leasing market for all property types in the coming year. Activity in the investment market, which began its recovery earlier than anticipated in 2010, will expand beyond assets at the top and bottom of the quality scale to include properties with slightly more risk.
“All things being considered, 2010 was actually better than most anticipated it would be – we saw positive net absorption and an uptick in investment sales during the second half of the year, positioning us for a continued recovery in 2011,” said Robert Bach, senior vice president, chief economist of Grubb & Ellis. “We have challenges to overcome, and we don’t expect fundamentals to return to their pre-recessionary peaks for several more years, but we’re slowly and cautiously building the foundation necessary to do just that.”
More Liquidity in Debt and Equity Markets to Spur Higher Investment Activity
In 2010, both investors and lenders began to re-enter the playing field, with the primary focus being minimizing risk. As a result, core, well-leased assets were in strong demand, often receiving multiple bids, while extremely distressed, low-occupancy assets traded at modest prices. Properties between these two extremes – suburban assets in second-tier markets, for example – were largely unsuccessful in attracting buyers and underwriters. Lenders and investors will broaden their search parameters in 2011, leading to more activity in the higher-risk middle of the scale. Prices for the best properties will stay strong, although the national price indexes may be restrained by a greater volume of riskier properties in the sales mix.
“With all of the capital that lenders and investors have been sitting on, they are more likely to consider transactions farther off the ‘fairway’ than we saw last year now that the capital markets are thawing,” said Bach. “Look for investors to broaden their horizon beyond trophies and trainwrecks, which should result in a 75 percent increase in transaction dollar volume from 2010 levels.”
Office Market Lags as Jobs Remain Elusive
In 2011, employers are likely to add just 1.5 million net new payroll jobs – right at the level needed to accommodate the growing labor force but not enough to substantially offset the unemployment rate, generating a modest recovery in the office market. Uncertainty over employer health care costs could further discourage hiring, especially among small businesses. Corporations dealing with these and other challenges will continue to focus on minimizing occupancy costs.
As a result, the office market will experience a half-speed recovery in 2011. After peaking at 17.9 percent in the second quarter – just 10 basis points shy of its all-time high in the past 24 years – the vacancy rate ended 2010 at 17.8 percent. Grubb & Ellis researchers expect the vacancy rate in 2011 and 2012 to drop to 17 percent and 15.9 percent, respectively. This is approximately half of the 200-basis-point annual decline typical for a healthy recovery cycle.
The company expects positive net absorption of 35 million square feet in 2011, while 2012 is expected to see 47 million. This represents moderate performances compared with the expansion of 2005 to 2007, when annual absorption ranged from 62 to 89 million square feet per year. The pace of recovery will be held back by slow job growth and the substantial inventory of shadow space – unoccupied space due to layoffs but not officially accounted for as vacant. One-third of the net new demand for space in 2011 will be accommodated by shadow space and thus will not affect the vacancy rate or count in the absorption tally. In 2012, shadow space will accommodate one-quarter of the net new demand. New construction completions will be low in the next two years, consisting primarily of build-to-suit projects and a handful of larger projects, such as the World Trade Center reconstruction in New York.
Asking rental rates bottomed out in 2010 but will experience only slight gains in the next two years, with tenants retaining the bargaining leverage. Class A asking rents, which ended the year at $30.83 per square foot per year gross, are expected to rise by 0.4 percent in 2011 and 1.4 percent in 2012. Effective rents are likely to see more improvement as landlords decrease concessions, such as free rent and tenant improvement allowances, before they raise asking rates. CBD markets will see slightly higher rental rate increases, powered by stronger tenant demand for the best properties in supply-constrained, high-profile areas such as the District of Columbia, Midtown Manhattan, and key submarkets in Boston and the San Francisco Bay Area. Smaller, non-coastal CBDs are unlikely to share in that market dynamic.