Even the buzz from new and repositioned properties -- and a boost from a new Nationals baseball stadium -- may not be enough to shield the nation's capital from a softening in the travel industry.
It's already starting to be felt. Occupancies in Washington fell slightly in the first quarter, according to Smith Travel Research. "We're having less people stay in hotels at the same time we're having more rooms available," says Jan Freitag, a vice president at Smith Travel. "So every hotel gets a little less than they did before."
The capital region is one of the country's largest hotel markets, and supply is expected to rise by about 4.6% this year. That's up more than 4,292 rooms to 97,503, well above the 2.2% growth expected this year nationally, Smith Travel says. A big chunk of that is a bet made by Gaylord Entertainment Co. on its 2,000-room Gaylord National Resort & Convention Center. Billed as one of the East Coast's largest noncasino hotels, it opened last month on the Potomac River in Maryland.
Although plans for a new 400-room high-end hotel in the mixed-use CityCenter DC project were just announced, it's generally more difficult to secure sites for new construction within the city. As a result, renovations or overhauls of existing hotels are more prevalent than new construction.
In all, 13 hotels in the city are among a total of 35 hotels in the metropolitan area that have announced renovations, compared with 29 in the Chicago area and 20 in New York City region, says Patrick Ford, president of Portsmouth, N.H.-based Lodging Econometrics. Projects can run from a simple new décor to complete architectural overhauls that often accompany ownership changes.
Among the repositioned properties is Donovan House, a former Holiday Inn that was renovated and reopened downtown on Thomas Circle as a boutique hotel. Just blocks from the White House, the St. Regis Washington D.C. reopened in January after a $52.5 million renovation with such amenities as flat-screen televisions behind bathroom mirrors. Meanwhile, Washington-based Monument Realty is working on acquiring an equity partner that would enable it to get started on a $170 million renovation of the Watergate Hotel.
Meantime, there are some signs that the city's office market is slowing. Vacancies are rising in many submarkets, and the net increase in the city's total occupied office space fell to 142,479 square feet in the first quarter from about 645,000 square feet in the year-earlier period, according to Cushman & Wakefield. Some tenants hold off on making decisions before presidential elections, says Brian McVay, executive vice president for Cushman & Wakefield in Washington.
Nevertheless, the nation's capital, which anchors a region that is home to about 5.4 million people, still commands some of the country's richest office prices. Demand is driven by the need of many politicians, consultants and agencies to be close to the seat of government. The average first-quarter asking rent for prime space was nearly $60 a square foot in the central business district, nearly twice the $30 range of suburban Maryland and Virginia.
Federal spending in the region is a dependable economic driver that is expected to rise by about 2.5% this year to $127.2 billion, according to economist John McClain of George Mason University. That's off from the 10% growth rate seen in the early 2000s as the Homeland Security initiative ramped up, but Mr. McClain predicts spending will most likely continue to climb, no matter who takes over as president next year. "There will be some changes, but it's like turning a battle ship," says Mr. McClain
When the owner and operator of the Trump casinos in Atlantic City, N.J., looked to refinance debt and fund the construction of a new Taj Mahal hotel late last year, it turned to a tiny bank in Las Vegas, rather than the big investment banks that have dominated real-estate lending in recent years.
Beal Bank Nevada provided a $500 million credit line -- its first commercial loan in three years. "We're re-entering the market because of the fact that you can make solid loans again, and you don't have to compete with dumb money," says Andy Beal, the bank's founder.
During the recent commercial boom that took off in 2005 and lasted through early 2007, Wall Street called the shots on lending. Investment banks pooled commercial mortgages, bundled them into loans and sold them to investors as bonds, called commercial mortgage-backed securities. The cheap, ample debt fueled a real-estate boom that sent prices soaring to record levels.
So-called balance-sheet lenders -- those that make loans and hold on to them, such as life insurers, some regional banks and pension funds -- found it hard to compete, because they typically require more cash down and enforce more stringent terms. "It was increasingly difficult to find well-structured, high-quality deals adequately priced for the risk," recalls David Brown, head of global private markets at TIAA-CREF, the largest U.S. retirement fund.
Yet, as the frenzy reached its peak in early 2007, underwriting became increasingly lax and investors started to balk at buying the bonds. By summer, investment banks had scaled back their lending significantly. Sales of commercial mortgage-backed securities are expected to plunge by half this year, from a record of $230 billion last year, Moody's Investors Service predicts.
That set the stage for the return of balance-sheet lenders. Among those that have jumped in over the past few months: regional bank M&T Bank, insurer MetLife Inc. and TIAA-CREF.
To be sure, few expect make-and-hold lenders to compensate for Wall Street's absence. Insurance companies, for example, "are not going to do $200 billion a year, and their lending volume as a whole might be in the range of $40 billion to $50 billion," says David Twardock, head of Prudential Financial's commercial real-estate finance business in Newark, N.J. "There is a need for a functioning securitization market."
But while Wall Street remains virtually seized up, balance-sheet lenders are opening their taps. TIAA-CREF and MetLife recently teamed up to provide General Growth Properties Inc., a real-estate investment trust, a $400 million loan to refinance Columbia Mall in Columbia, Md. The deal might have gone to Wall Street before the credit-market turmoil. TIAA-CREF also recently originated a $185 million loan for ProLogis, a Denver-based REIT, to purchase 19 industrial properties in seven markets across the country.
M&T Bank, based in Buffalo, N.Y., saw its loan volume for New York City transactions increase more than 20% in the fourth quarter from a year earlier, and expects the trend to continue into this year. "We're winning more deals with acceptable returns and acceptable loan terms like those requiring at least 25% of equity," says Peter D'Arcy, the bank's group manager of structured real-estate finance.
Indeed, borrowers who look to these lenders to help them close a deal must accept tighter terms. Gone are loans that were common during the boom, such as those that only required interest to be paid for as long as 10 years, and those that exceeded 80% of a property's value.
"The general mantra is more conservative underwriting," says Jeff Hanson, executive vice president at Grubb & Ellis Co., a Chicago-based real-estate services firm.
Nonetheless, these balance-sheet lenders are coming to the rescue of those who are desperate to close a deal quickly, or who are scrambling to refinance short-term debt into a longer-term mortgage.
For instance, New York developer Harry Macklowe was in default on a predevelopment loan for a speculative office building in midtown Manhattan but recently received a much-needed loan commitment from Union Labor Life Insurance Co. in Washington, D.C. "It's a good lending opportunity for us," says Herb Kolben, a Union Labor senior vice president, who declines to specify the loan terms prior to its closing. Had it not been for the credit-market swoon, he adds, "We wouldn't have had a chance to bid for this, because [Wall Street] lenders were much more aggressive in structure and pricing."
Of Beal Bank Nevada's financing for the Trump project, John Burke, executive vice president and treasurer of Trump Entertainment Resorts Inc., said: "As we looked around all the possibilities, Beal Bank provided us a quicker execution without us having to deal with the uncertainties in the market."
-- January 25, 2008
A common real estate maxim states that retail development follows new housing. These days, though, retail real estate may be following the home market off a cliff.
Sparked by the housing boom across the country, shopping-center and mall developers have gone on a tear in recent years, delivering millions of square feet of new space in Phoenix, San Antonio, Cleveland, Tampa, Fla., and numerous other markets. Since 2005, developers in the U.S. have produced more retail space than office space, rental apartments, warehouse space or any other commercial real estate category.
But just as that new space is hitting the market, demand is declining. Mounting home foreclosures have sapped the strength of previously hot markets like Phoenix and California's Inland Empire near Los Angeles, leaving retail-property owners with rising vacancies and slower leasing rates for new space. And anemic sales gains in the just-completed holiday season fell short even of the retail industry's tepid preseason forecast.
More shopping centers are suffering defections such as those faced by Phoenix's Paradise Valley Mall, which was built in 1979 and renovated in 1990. Though the mall has a healthy roster of tenants, an anchor slot vacated by a predecessor of Macy's Inc. has been vacant for two years. Among the empty storefronts in the otherwise vibrant venue: one left behind by bankrupt Bombay Co.
Analysts expect that more bankruptcies and liquidations of second-tier retailers are likely this year. Some retailers, such as Talbots Inc., are closing weak stores. Projected retail demand will justify only 43% of the new space delivered this year and last, predicts market-research firm Property & Portfolio Research Inc.
Retail development is "basically at a three-year high," says Steven Marks, chief of research on real estate investment trusts at Fitch Ratings Inc. "And that three-year high is at a point in the economic cycle where it's probably not the best time to be developing right now."
If consumer spending falls off much more, the retail-property market faces a bloodbath, some say. "In a recessionary scenario, retail gets killed, absolutely killed," says Suzanne Mulvee, senior economist at Property & Portfolio Research.
If the market holds steady, current trends will still translate into varying degrees of stress for owners of retail property. Most of the country's largest malls are owned by huge public companies that are financially equipped to survive a downturn, but the stocks of many of them are trading near their 52-week lows.
And smaller owners that bought or developed property at the top of the market expecting high occupancy and high rents may face problems with their lenders. Some are already scrapping or delaying projects that are scheduled to be delivered this year.
Even landlords with relatively stable properties aren't assured of escaping the credit crunch. Australian REIT Centro Properties Group, which has amassed a big U.S. retail portfolio in recent years, is scrounging to find an equity partner or a buyer because it can't pay off looming debt maturities. And the market is closely watching mall operator General Growth Properties Inc., which has $2.8 billion in debt coming due this year.
Meanwhile, for consumers, retail woes could mean more empty space in shopping centers and, in extreme cases, more failed projects, leaving suburban landscapes blighted with dark buildings set back on vast, empty parking lots. Property & Portfolio Research foresees retail vacancies jumping to nearly 12% by the end of this year in the top 54 U.S. markets, up from 10.4% in last year's third quarter.
Retail real estate is more closely tied to the housing market than other commercial-property types. As a result, retail landlords feasted in recent years on rapidly expanding tenants and easy financing as carefree shoppers spent their home equity with abandon. Some 145 million square feet of new shopping-center, mall and other retail space was built in the top 54 markets last year, with another 123 million square feet in the pipeline this year, according to Property & Portfolio Research. In comparison, the annual average between 2000 and 2006 was 118 million square feet.
Few markets have takFew markets have taken as sharp a turn as the Phoenix metro area, which has nearly doubled its population since 1990. With easy credit for homebuyers now gone, the number of homes listed for resale in Phoenix fell 24% from November 2006 to November 2007, according to housing-data provider Metrostudy Inc. Median resale prices are down 8.7% in the same period. In the Phoenix area's Pinal and Maricopa counties, home loans are in default at a rate of 6.1% and 3%, respectively, of the existing housing stock, according to Foreclosures.com.
Despite Phoenix's housing slowdown, 9.3 million square feet of new retail space was added last year and another seven million is expected this year. As a result, Phoenix's retail vacancy rate is expected to double by the middle of next year, climbing to 10% from 4.8% at last year's midpoint, according to Property & Portfolio Research. Retail property values, which rose 12% in 2005, are expected to decline over the next three years.
The Phoenix area's outlook has developers retrenching. Simon Property Group Inc., a mall REIT, recently wrote off its $26 million early investment to co-develop a mall in suburban Phoenix. Glimcher Realty Trust last year dropped an option to co-develop a mall on 100 acres in the suburb of Surprise. Among the projects whose openings have been pushed back by a year or more at the insistence of anchor tenants are a DeBartolo Development LLC shopping center anchored by a SuperTarget and a Wal-Mart-anchored project. Both retailers say they will hold off on those projects until the surrounding area's population growth justifies them.
The story is similar in California's Inland Empire, another fast-growing market now besieged by foreclosures. The area, which includes San Bernardino and Riverside, is expected to have construction totaling more than 11 million square feet over this year and last, the most there since the late 1980s. Retail vacancies, now at 12.8%, are forecast to hit 15.5% by the end of 2011, according to Property & Portfolio Research.
Wal-Mart Stores Inc. recently dropped talks to move and expand one of its stores to a proposed 300,000-square-foot, mixed-use project in San Bernardino. Developer Hopkins Real Estate Group is mulling scaling back the retail part of the project and replacing it with a less volatile use, such as industrial space.
There is also an impending surplus of retail space in markets not known as hot spots. Take Cleveland, an industrial city with negligible job growth in the past year. Retail projects under construction there total 6.5% of the area's existing base, or nearly twice the national average, according to Grubb & Ellis Co. At Bridgeview Crossing, a 550,000-square-foot shopping center being built in the suburb of Garfield Heights, 75% of the space is already leased to tenants like Target Corp., Lowe's Cos. and J.C. Penney Co. Renting the remainder will be more challenging. "We are talking to a variety of national, small-shop and apparel tenants who are saying to us, 'We may reduce the velocity of our expansion for a period,' " says David Mrachko, leasing director for developer Snider-Cannata Interests LLC of Cleveland.
In Omaha, Neb., a metro area of less than one million people, projects proposed along the 204th Street corridor on the city's west side stand to increase the retail-space inventory by a staggering 20%. Some observers doubt that all of the projects will be built soon, if ever. All told, they span 4.5 million square feet. "Many of these projects will fall by the wayside because some of these developers do not have holding power to wait a number of years until the area is ready," says Dave Lanoha, owner of Omaha-based Lanoha Development Co., which plans two shopping centers totaling 350,000 square feet along 204th Street.
-- Jennifer Forsyth contributed to this article. -- January 10, 2008
The value of commercial real estate, which nearly doubled in the past seven years, is now starting to decline due to the credit crunch, according to a report released yesterday by Moody's Investors Service.
The report found that the value of commercial property declined 1.2% in September from the previous month. Particularly hard hit were apartments in the West and office property in most states other than California.
The report is an early sign that the commercial-property sector is being dragged down by the growing reluctance of lenders to extend credit for anything related to real estate, which in turn could create a new drag on the economy and additional problems for investors. Declining commercial-property values could lead to an increase in default rates on commercial real-estate loans and on commercial mortgage-backed securities.
No one is predicting that defaults in the commercial sector will come close to rivaling those in the housing sector. The default rate for commercial mortgage-backed securities is about 0.4%, compared with a 20% default rate for subprime, or high-risk, home loans, the hardest hit segment of the residential mortgage market. And commercial rents in many markets continue to rise.
Tad Philipp, a Moody's managing director, says he wouldn't be surprised to see the commercial-mortgage default rate double or triple, but he notes that still won't be "alarming" because historically the default rate is about 1%.
Still, the latest trends "might represent the inflection point in commercial real estate values given the ongoing liquidity crunch," the report states. Commercial-property values are primarily being hurt by the increasing cost and declining availability of financing. Given the higher cost of debt, buyers need to pay less to get the return on equity they want.
Even a slight decline in values could make it difficult for property owners to refinance their mortgages, especially if they have been paying only interest on their existing debt and not paying down principal. Such interest-only mortgages have become increasingly popular.
Defaults also would likely increase if the economy slumps and drives down commercial rents. Already there are signs of slowing in some markets. Available sublease space swelled to 77 million square feet in the third quarter from 73 million square feet nationwide in the second quarter, the first national increase in five years, according to Grubb & Ellis Co.
Mr. Philipp predicts there will be "more downs than ups" in coming months.
The decline in property values reported by Moody's comes after years of sharp increases. In July, for example, investors paid $510 million, or a record $1,600 per square foot, for the 33-story office tower at 450 Park Ave. in Manhattan.
Some surveys indicate prices are still rising. For example, commercial property appreciated 2.2% in value in the third quarter, according to an index published by the National Council of Real Estate Investment Fiduciaries. NCREIF looks at appraised value while Moody's bases its values on actual sales, according to Moody's executives.
Other research firms have found sales volume to be clearly declining. Real Capital Analytics said in an October report that the credit crunch derailed a number of transactions in the third quarter of this year, and that sales volume for office buildings dropped below $8.5 billion in September, compared with an average of $11.5 billion in the Septembers of 2005 and 2006.
-- Jennifer S. Forsyth contributed to this article.
-- November 20, 2007
The amount of sublease office space available to tenants increased nationally for the first time in five years, an indication that commercial leasing is slowing in many markets across the U.S.
The increase demonstrates that many businesses related to home-mortgage lending have returned space to the market. It also shows that many industries are nervous in light of the credit-market turmoil and want to keep costs down as much as possible until they see whether the economy will slump further in coming months.
Sublease space, in which tenants lease their rented space to other tenants, usually at below-market prices, increased to 77 million square feet in the third quarter from 73 million square feet nationwide in the second quarter, according to data provided by Grubb & Ellis Co., a real-estate services firm based in Chicago. That marked the first national increase since the third quarter of 2002, when the economy was in recession after the dot-com bust and the terrorist attacks of 2001. In the third quarter last year, available space was 76.5 million square feet.
The amount of sublease space in a market can affect the extent to which landlords can push up rents, because their "direct" space is competing with short-term sublease space that is often much cheaper, and tenants have more bargaining power.
A total of 77 million square feet is only about half the amount that was available in the so-called shadow market at the bottom of the cycle in the first quarter of 2002 and shouldn't be reason for office landlords to despair. Yet, the increase in sublease space, combined with a national vacancy rate that remained flat or barely budged downward over the quarter (depending whose data are used), indicates the market could be softening, says Bob Bach, senior vice president of research for Grubb & Ellis.
Even so, rents continue to climb. Average effective rents -- the amount tenants pay after concessions -- increased 2.4% nationwide over the third quarter, according to Reis Inc., a real-estate research firm.
Yet, soaring rents over the past few quarters could be one reason that sublease space is on the rise. As costs increase, businesses may look to downsize or even move out of a market to save money even as they must still pay on their previous lease. "Some of it is part and parcel of a market when rents have been rising rapidly, and suddenly there's more uncertainty and caution," Mr. Bach says.
Such uncertainty is related to the continuing fallout from the home-mortgage industry. Many troubled lenders are closing branch offices, and home builders have scaled back their operations. Indeed, Countrywide Financial Corp., the nation's biggest home-mortgage lender, is putting as much as 200,000 square feet of office space in the Dallas suburb of Richardson, Texas, on the shadow market and another 5,000 square feet in nearby Arlington, according to Tim Terrell of Stream Realty Partners LP, who represents Countrywide.
Sublease space increased over the third quarter in 29 of the 47 markets that Grubb & Ellis monitors. While shadow space continued to drop in the strongest office markets, such as New York, Boston and San Francisco, Mr. Bach predicts that even those markets will start to see an increase in coming quarters.
In South Florida, one of the areas hardest hit by the housing crisis, sublease space in Miami-Dade County increased 28% over the past four quarters and increased 36% in Fort Lauderdale-Broward County over that time. Moreover, rising rents in Florida have been compounded by escalating insurance premiums for storm coverage and higher real-estate taxes because of the run-up in property valuations, forcing some tenants to look for cheaper space.
San Diego, where sublease space has increased 43% over the past four quarters, also has been hit hard by the housing crisis as well as an increase in office supply. Developers have added four million square feet of office space in the past few years. Thus, in some case, tenants are getting good deals on new space and subletting their older offices. "For the most part in San Diego County, there are a fair amount of opportunities in the marketplace today to leverage a transaction," says Brian Ffrench, a San Diego-based senior executive with Studley Inc., a tenant-representation firm.
Studley represented one law firm, Mintz Levin Cohn Ferris Glovsky & Popeo PC, in taking more than a floor of sublease space in the northern part of the county that was vacated by an investment firm that decided against maintaining so large an office in San Diego. That allowed Mintz Levin to get palatial offices at 20% below market rate.
In Orange County, Calif., where many of the mortgage brokers are based, the amount of sublease space on the market hasn't changed since this time last year, about 2.4 million square feet. That is because many of those lenders "threw in the keys," Mr. Bach says, and filed for bankruptcy. So the space is being marketed by landlords as direct space instead of sublease. The vacancy rate there ticked up 0.7 percentage point over the past quarter, Reis found.
-- November 01, 2007
By Kemba J. Dunham From The Wall Street Journal Online
After years of flying under the radar, medical office buildings are emerging as an attractive commercial real-estate asset, thanks to strong fundamentals and sky-high prices for other types of properties.
Medical office buildings, or MOBs, represent a tiny niche of the broader office-building sector. They have often been overlooked not only because they lack the pizazz of gleaming skyscrapers, but because their complex operating structures can scare off traditional office investors, analysts say.
Now, with so much capital chasing all types of commercial real estate, "MOBs have become more mainstream...and a growing number of capital providers are now investing in the sector," says Jim Sullivan, an analyst at Green Street Advisors, a real-estate research firm in Newport Beach, Calif.
Married to the MOB
Several big REITs have bolstered their holdings of medical office buildings, or MOBs.
Health-care real-estate investment trusts, including many of the nation's largest ones, have been among the most aggressive buyers. Last month, Health Care REIT Inc., based in Toledo, Ohio, acquired 17 MOBs across 10 states. Healthcare Realty Trust Inc., Nashville, Tenn., is close to selling the last of its senior-housing properties, which had a total value of $400 million, so it can focus exclusively on MOBs, its original business.
Jerry Doctrow, an analyst at Stifel, Nicolaus & Co. in Baltimore, notes that at a recent REIT-industry conference, certain health-care REITs said they were turning to MOBs partly because the price of one of their mainstay holdings -- private-pay senior housing -- has been bid up by competitors. These REITS are also uncomfortable with the risks of remaining, lesser-quality properties available in the marketplace.
MOBs are seen as an attractive alternative in part because health-care REITs believe the baby boomers eligible for Medicare at age 65 will have more time to head to the doctor upon retirement. "MOBs are where the baby boomers are going to touch the health-care system first," says Debra Cafaro, chief executive of Ventas Inc., a health-care REIT based in Louisville, Ky., that is looking to expand its MOB holdings.
Another plus: Rent growth is steadier than in traditional office buildings, where imbalances in supply and demand have historically resulted in volatility, says Green Street's Mr. Sullivan.
Tenant retention rates tend to be high, particularly in buildings located on hospital campuses. "The tenants are doctors who have patients who are being treated at that adjacent hospital and that creates a strong tenant demand. We like that," says Mark Wallace, chief financial officer of Health Care Property Investors Inc., the nation's biggest health-care REIT by market value. MOBs are now 28% of the Long Beach, Calif.-based REIT's total portfolio, up from 23% at the end of 2002.
Shortened hospital stays also work in favor of MOBs, adds Richard Anderson, a senior REIT analyst at BMO Capital Markets. "That's a really good trend that isn't going to reverse," he says.
MOBs also have some risks. Analysts note they tend to be management intensive. "Doctors can be difficult [tenants] because they've got bigger things to talk about than rent payments," says Mr. Anderson.
Medicare can also cause complications. In a MOB, there can be lots of doctors dealing with different specialties, all subject to myriad forms of Medicare reimbursement. "If for any reason Medicare takes a hit, that can be an issue in the valuation of the building," says Mr. Anderson.
And although not as pricey as some other types of commercial real estate, MOB assets, and the REITs that own them, are becoming more expensive because investors consider them prime takeover candidates. The fact that four of the biggest health-care REITs have signaled their intention to expand into the sector could drive prices up even more.
In addition, certain non-REITs and traditional office REITs have increased their MOB holdings. Some analysts expect increased interest from private-equity firms that have snapped up other forms of real estate, though the management nuances of running a MOB portfolio could make it a more difficult transaction for firms that often quickly sell off rather than manage properties.
The recent focus on MOBs has caused capitalization rates, or the return on investment during the first year of ownership, to compress, just as it has with other property types. Mr. Anderson says that MOBs have become increasingly expensive relative to historic pricing. "The cap rate for a good-quality MOB is well into the 6% range, whereas the cap rate for a good-quality traditional office building can be below 5," adds Mr. Anderson.
But that, of course, could soon change. Some equity analysts are assuming a higher increase in capitalization rates over the next year across all sectors because of higher debt costs and modestly slower growth assumptions.
PHOENIX -- The temperature is above 100 degrees, yet construction crews are busy at work on just about every corner of this city's downtown.
The convention center is being expanded, a light-rail system is coming and several hotels are sprouting up alongside new offices and retail space.
"I really don't see construction slowing down in the foreseeable future," said Troy Hoberg, director of business development at Hunt Construction Group Inc., which built the $400 million downtown stadium for the Arizona Cardinals and is now working on the $600 million convention-center expansion. "We've been so busy we're having trouble finding enough workers."
What Property Bust?
• The Boom: Construction of office towers and other commercial projects remains strong in Phoenix and other parts of the country.
• The Impact: That is cushioning the blow of the housing slowdown, fueling strong regional growth.
• The Caveat: Commercial construction could slow if lenders burned by defaults on home mortgages pull back from other property sectors.
The volume of commercial construction in Phoenix may help shed some light on a question that has puzzled regional economists: Why do some cities mired in a housing bust continue to enjoy strong economic growth? In Phoenix, the answer appears to be that commercial construction is helping to cushion the fall.
Phoenix led the nation's major employment markets in job growth during 2005 and 2006. But job growth slowed in the second quarter of 2007 to a 1.2% annualized rate, dipping below the national average of 1.3%.
Mark Zandi, chief economist at Moody's Economy.com, said the anemic job growth was primarily related to the collapse of the city's housing market. But employment could have fared much worse in a city where analysts estimate one in three jobs was tied to the housing market a few years ago. "Phoenix has a lot of other sources of growth, and that will tide it over," he said.
Indeed, the city's rapidly increasing population has long been an engine of economic growth. Phoenix is the fifth-largest city in the U.S. by population, with 1.5 million people and a median age of 33. Such demographics continue to attract employers to the region, and as a result, the unemployment rate dropped to 2.7% in May, its lowest level since 1999.
The influx of people and jobs has helped the city double the size of its economy in the past decade to an estimated $176 billion in gross metropolitan output for 2007, a 6.8% increase over last year, according to Global Insight Economics.
The residential-housing boom that was fueled in part by rapid population growth has given way to a growing market for commercial construction projects. Even though home sales in Phoenix dropped nearly 30% last year, an estimated $2.3 billion in commercial projects are planned for downtown Phoenix alone, an unprecedented amount.
Phoenix isn't alone. Commercial-construction activity has "been very strong for most of this year in most regions of the country," said Ken Simonson, chief economist at the Associated General Contractors of America. He said the notable exceptions are Michigan, Ohio and some parts of Indiana, which have been hurt by the problems in the auto industry.
The Census Bureau's latest report on construction outlays found that the value of private, nonresidential construction spending jumped 17% in June to $346.6 billion compared with a year earlier, led by hotels, office buildings, utilities and educational institutions. Residential construction, meanwhile, continued to contract.
To be sure, commercial construction can't offset all of the downdraft from weak housing. The residential market is much larger than the commercial market, and it plays a bigger role in the U.S. economy. When people buy new homes, they also tend to buy furniture, appliances and home electronics, boosting consumer spending. Commercial-construction activity doesn't have a significant impact on consumer spending, though new commercial projects add value to communities over the long term and attract new businesses, which add to the tax base.
Moreover, it isn't clear that commercial construction will continue to expand at the current pace given the increasing skittishness of banks and other lenders to extend loans to anything related to real estate. Even though most of the problems in the credit markets are related to rising defaults and foreclosures on residential mortgages, some bankers are pulling back on all types of loans, a trend that could threaten the national economy.
If the pullback in credit spreads to commercial real estate in a significant way, the economy in Phoenix and other places could lose one of its last major growth supports. Of course, with so many projects under way and years away from completion, the commercial market can't change direction as quickly as residential construction did. But the credit pullback is a threat if banks stop funding construction.
Cities such as Phoenix, Houston and Las Vegas, however, which continue to see strong growth in population, employment and business, have created a huge demand for commercial construction.
"We have unprecedented public infrastructure being built," said Barry Broome, president of the Greater Phoenix Economic Council. "Hospitals are expanding at a staggering rate."
Indeed, commercial developers are so busy they are complaining about labor shortages. Mark Minter, the executive director of the Arizona Builders Alliance, said contractors are beginning to turn down work because they can't find enough skilled workers "all up and down the employment ladder."
Not only are plumbers and electricians in short supply but also managers to oversee the work. Hunt Construction has offered its older managers stock options and higher pay in an effort to keep them from retiring. "It's becoming difficult to replace them with the younger generation," said Mr. Hoberg. "There aren't enough young guys in the pipeline."
The skilled construction workers now in high demand aren't the same ones who were employed during the housing boom. While some construction jobs -- such as painting and occasionally plumbing or electric work -- are transferable from residential to commercial construction, most jobs aren't.
"Most people in single-family construction can't work on a high-rise," said Alan Torvie, vice president of construction for Red Development LLC, whose company is working on one of downtown Phoenix's most high-profile projects, the $1 billion mixed-use development known as CityScape.
And now that Phoenix is building up -- rather than out -- there is a huge demand for cranes and for the tower-crane operators who run them.
That has been a boon for 43-year-old tower-crane operator Todd Witzens. During the housing boom, Mr. Witzens was sidelined because few high-rise construction projects were going up. But now he has his pick of jobs.
"People are calling me up all the time," he said, trying to lure him with higher wages, insurance packages, parking passes and tickets to professional sporting events. "They're desperate to get someone."
-- August 14, 2007
Capitalization rates were mixed in July. For central-business-district office properties, average cap rates declined to 5.97% last month from 6.09% in June. But average cap rates for apartment buildings rose to 6.18% from June's 6.08%. The capitalization rate is a calculation of rental income in the first year of ownership divided by the purchase price. The data are compiled by Real Capital Analytics Inc.
-- August 31, 2007
A strong fourth quarter helped boost the strip-mall sector to its best year since 2000, but the shopping-mall market posted mixed results.
Rents rose moderately in the U.S. mall and strip-mall sectors in the fourth quarter, while vacancies edged up in both, according to a survey. But the similarities end there for 2005, which was the best year for strip malls since 2000, while the shopping-mall market was essentially flat.
Shopping malls can be more susceptible to downturns in the economy and changes in consumer taste than their strip-mall cousins because they put more emphasis on discretionary items; strip malls tend to have more stores selling nondiscretionary items and are less affected by slips in consumer sentiment.
The shopping-mall vacancy rate tiptoed up to 5.5% in the fourth quarter from 5.4% in the third quarter, according to a quarterly survey of the top 67 U.S. markets by Reis Inc., a New York-based real-estate research firm. Asking rents moved up 0.5% to $38.27 per square foot per year in the last quarter, from $38.08 in the third quarter. The 5.5% mall vacancy rate at the end of 2005 was slightly higher than the 5.3% logged at the end of 2004. Rents were up just 1% for the year, putting their two-year gain at an anemic 0.9% after a 0.1% decline in 2004.
Asking rents at strip malls, on the other hand, gained a solid 3.2% in 2005, their best showing in five years. While the strip-mall vacancy rate crept down to 6.8% at the end of 2005 from 7% a year earlier, absorption -- the net change in occupied space -- was strong at 30.3 million square feet, also the best showing in five years.
For the quarter, average rents in strip malls were up 0.9% to $18.41 a square foot from $18.24 in the third quarter. Absorption was strong at 8.6 million square feet, but a stepped-up construction pace lifted vacancies to 6.8% in the fourth quarter from 6.7% in the previous period.
-- February 03, 2006
Demand for office space in the U.S. remained sluggish in the first quarter, a further indication that the office recovery is unevenly distributed and that rent increases may be due to moderate.
Rents in the nation's office buildings increased 2.8% on average in the first quarter, led by sharp jumps in the tight markets of New York and San Francisco, according to a survey of 79 large U.S. office markets excluding New Orleans by Reis Inc., a New York real-estate research firm. But demand for space continued to cool from the pace of early last year, barely keeping up with the still-restrained rate of new construction.
The rent jump was the biggest since the peak of the last office boom nearly seven years ago, but rents are a lagging indicator of an office market's health, says Lloyd Lynford, chief executive of Reis. "The car is moving really, really fast," he said, referring to the big rent jump. "But there's a question about how much gas remains in the tank."
That's because absorption -- the net gain in occupied space and the key barometer of demand -- was for the third straight quarter off the pace set when the office recovery began in earnest in the middle of 2004.
In the first quarter, tenants absorbed 10 million square feet of space, up from 8.1 million square feet in the previous quarter but well below the 15.7 million averaged from the third quarter of 2004 to the second quarter of 2006. Since then, absorption has averaged just 10 million square feet per quarter.
The slowdown in demand has slowed the declines in vacancy rates. In the first quarter, the vacancy rate edged down to 13.1% in the first quarter from 13.3%. That was helped by the restrained pace of new construction, which brought on 7.3 million square feet of space in the quarter.
But that could be the end of low supply. Reis projects developers will open 76 million square feet of new office space by the end of this year. That amount could put pressure on a vacancy rate that is still well above the 2000 low of 7.9%.
Demand for office space is directly linked to nonagricultural employment growth and companies' expectations about the economy. Mediocre job growth for the last several months has thus damped demand for new space.
While average office rents were up at a near-record pace in the quarter, the median increase in the 79 markets was far lower at 1.3%, signaling unevenness in a recovery that is tilted toward the coasts. Reis projects rents nationwide to rise on average 5% to 6% this year, down from 9% in 2006.
But in the tightest markets, rent increases are expected to be more robust. New York rents rocketed up 6.5% in the first quarter, while those in San Francisco were close behind at 5.6%. Of the top 10 rent increases, just two came from non-coastal cities: Houston and Austin, Texas.
The rental increases in New York are one reason the sales market there remains on fire. Just last week, 230 Park Avenue, known as the Helmsley Building, was bought by Anthony Westreich of Monday Properties and Goldman Sachs Group for $1.15 billion, giving the previous owners, Istithmar PJSC and Island Capital Group, a $400 million profit in 18 months.
"This island has become the wild, wild west," said Robert Emden, principal of PBS Realty Advisors LLC, referring to Manhattan.
-- April 04, 2007
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