For a current appraisal assignment I had to conduct a market study in the Pinellas Office Market, comparing data between 1998, 2006, and 2010.
I obtained the Maddux Report for all three years. Maddux surveys office and retail space in the Tampa Bay area and delivers data on total leasable space, vacant space and average lease rates.
For the three years in question I compiled data which are presented in the following chart:
|All surveyed Office Buildings – Pinellas|
|Total surveyed SF||12,639,139||11,969,092||10,406,943|
|Vacancy Rate all surveyed buildings||27.29%||15.82%||10.65%|
|Rent low average||$16.86||$16.19||$13.09|
|Rent high average||$17.70||$16.90||$13.89|
Vacancy rates are weighted averages; lease rates are averaged and no distinction could be made between net or gross leases.
The first item which struck me was the relatively high vacancy rate in 2006 at the height of the market. Furthermore, I was amazed to see only a small difference between 2006 and 2010 lease rates. Especially when seeing the high vacancy rate of over 27% one would think that rates should have come down. A local real estate broker explained that the gross lease rates are the same, but hidden in the rates are much higher expenses and thus the landlord walks away with a much lower net lease.
These numbers needed a more in depth look and therefore I compared added space with increase in vacancy:
|Added Vacancy in Percent|
|Year||Vacancy in year||Increase in vacancy|
|Year||Space in year||Increase in space|
1. Although there was 1,176,595 SF vacant space in 1998, another 1,999,512 SF space was added with vacancy rates increasing from 10.65% to 15.82%.
2. Although there was 1,999,512 SF vacant space in 2006, another 670,047 SF space was added with vacancy rates increasing from 15.82 % to 27.29% 1. Although there was 1,176,595 SF vacant space in 1998, another 1,999,512 SF space was added with vacancy rates increasing from 10.65% to 15.82%
3. Vacancy increased disproportionally when compared to increase in space.
4. Rents between 2006 and 2010 remained relatively level; however expenses increased, giving the landlord less net lease.
Having done a lot of work in the condominium market I am used to the insanity of oversupply and investors who added unit after unit without proper analysis and due diligence.
Seeing similar action in the office market was kind of surprising and I learned something new with this study. Although this analysis is only valid for the Pinellas office market, there is enough evidence out there, that other markets did the same crazy thing.
The questions which remain to be answered are these:
How could decision makers fail to react to the obvious vacancy rates?
Why disregard the laws of supply and demand?
Like in many other cases, investors failed to research indicators for demand entirely and the known supply numbers were obviously underestimated.
When everyone is greedy, be cautious.
When everyone is scared, this is the time to be brave.
In any case, whenever one invests in real estate, it is strongly recommended to conduct a marketability analysis.
A good marketability analysis can make or break a development project and it is better to learn about the market before the mistake then after the mistake, which then ultimately is a failed development.
Due diligence once more became an integral consideration of every prudent businessperson. The question of when, where, how much and how fast need to be answered to successfully lease-up or sell-out. Timing is essential, not only in terms of when you will hit the market with your product but also in terms of a correct prediction of absorption.
Many of the dramatic vacancies could have been avoided with the help of an appraiser who works with a market analysis skill set.
Thank you for the professionals at Maddux to provide the data; keep the good work going, we analysts cannot work without your data!
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