ONCOR affiliates guardedly optimistic on office markets

Real Estate Weekly, Jan 13, 1999

Fifty-eight percent of ONCOR's 45 North American forecasters predict "guarded optimism" that their office markets will be healthy, growing and balanced in 1999," according to its 1998 Year-End North American Office Market Report, which is a way of putting on your sun glasses and rain jacket at the same time.

A surprising 36 percent of these local specialists were brightly optimistic in their outlooks, including forecasters in Baltimore, Boston, Chicago, Los Angeles, Dallas and even Montreal, which has been sitting under dark clouds for some time. Only forecast specialists in San Francisco, Portland and Vancouver admitted to 1999 outlook "tending toward concern."

These outlooks are important, since office markets tend to be peculiarly localized. In the aggregate, the year-end figures across North America offer a somewhat shaky foundation for unqualified optimism. ONCOR's year-end numbers show that new construction is outpacing absorption 2 to 1. In 1998, occupancy. in North America's major markets increased by 55.5 million square feet (msf); developers have close to 112 msf under construction.

Driving both construction and optimism are figures for overall vacancy. At year-end 1998, the aggregate vacancy in the 45 markets surveyed was 9.69 percent, down from 10.1 percent a year ago. The aggregate vacancy rate dipped to 7.56 percent in the Class A category. Fully 60 percent of the markets had year-end vacancy rates below 10 percent, with the West Coast cities of Portland (4.77 percent), Seattle (3.6 percent), and San Francisco (3.24 percent) reporting the lowest figures. Topping the vacancy chart was Montreal (17.5 percent), followed by Dallas (15 percent) and Chicago (14.4 percent).

As in nature, the rumble of thunder in real estate is heard after lightening has struck. ONCOR's local forecasters aren't hearing much thunder, but storm clouds continue to gather to the west (Asia) and south (Latin America), where struggling economies and curtailed consumer spending have lowered the appetite for imported goods. Office expansion and relocation decisions are driven by corporate strategies, earnings expectations and employment figures, and that news is mixed at best. If the economy slackens even moderately, the impact will hit the office markets late in 1999 or shortly thereafter, and the sun glasses will suddenly come off.

In the meantime, the prospect for the first half of 1999 seems positive. More than half the markets (52 percent) are reporting office building sales activity at "very strong" (16 percent) or "strong" (36 percent) levels. Only two markets, Montreal and the Silicon Valley, reported "very slow" sales activity. Prices, too, are hanging tough. Prices paid for office buildings in Atlanta, Boston, Detroit, Memphis and Washington, DC remain at record levels, and are at near record levels in Dallas, LA, Toronto and 10 other markets.

And why not? In 1998, owners controlled most markets, commanding high rental rates and offering few concessions. At year-end, the average rental rate for Class A space in North America's CBDs was $24.85; suburban rates averaged $22.51. Rents are expected to increase in 53 percent of the markets and stay roughly the same in an additional 45 percent. Only in San Francisco are Class A rental rates expected to drop, but that's hardly exciting news for Bay Area tenants, who already are paying the highest rates in North America.

ONCOR International, a leading organization of top-ranked, privately-owned commercial real estate companies, was established in 1977 to provide a full array of corporate and institutional real estate services to business and industry worldwide. ONCOR maintains 50-plus companies with 150 offices mover 200 markets throughout the United States, Canada Europe, Asia, South Africa and Latin America.