Western U.S. view point april 2012


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Western U.S. view point april 2012

  1. 1. CBRE Western U.S.www.cbre.com/research April 2012 Shifting Landscapes and Aftershocks: Western Office Markets on the Move By Darin Mellott, Senior Research Analyst, Salt Lake City After major shocks to the financial system in 2008 and According to the Q4 2011 CBRE North America Office ensuing Great Recession, west coast office market Vacancy Index, average vacancy for west coast office landscapes were altered. Even today, aftershocks markets at the end of 2011 was 17.3% compared to continue to be felt as adjustments in housing, local 16% nationally. Performance varies in the region industry and varying degrees of government austerity ranging from a low of 11.2% vacancy in San Francisco continue to shape market environments. Furthermore, to a high of 25.5% in Phoenix. Some of the reasons for financial markets still healing from events of the last varying performance will be explored in this report, but decade now face new threats from Europe’s sovereign in summary, these west coast office markets reflect debt crisis and businesses buffeted by uncertainty are broader trends. As such, some metros continue to reluctant to hire. All combined, this is the new struggle as others hit their stride. economic geography. Regional Average 17.3% Western U.S. Office Vacancy (%) National Average 16% This report briefly examines what is currently influencing 30.0% markets, and what will shape demand in the future. There are some common themes in west coast office 25.0% markets, for example, a thriving tech sector is a key element for growth in several metros; however, each 20.0% market maintains different strengths and vulnerabilities. 15.0% Some of the factors in play for San Francisco, Los Angeles, San Diego, Salt Lake City, Phoenix, and 10.0% Seattle will be examined. San Francisco: 11.2% Salt Lake City: 15.3% Los Angeles: 17.6% San Diego: 16.6% Phoenix: 25.5% Seattle: 17.9% The performance of metro areas is a product of the 5.0% health of local industries and intensity of problems that 0.0% plague them. For example, Phoenix is a metro area Source: CBRE North America Office Vacancy Index, Q4 2011 with a young and educated workforce, a positive for growth; however, it is a metro area held back by the San Francisco excesses of the past, particularly in real estate. On the other hand, Seattle, which maintains an enviable San Francisco’s greatest obstacle to growth as a workforce and leading industries, is not held back by developed market is cost. High costs can not only drive excesses in residential real estate and consequently, in businesses away, but also limit gains in population growth relative terms is performing well. from both in-migration and births. In fact, San Francisco © 2012, CBRE
  2. 2. Western U.S. ViewPointCounty is only one of four counties in the state of During 2011, the area’s office market experiencedCalifornia with a projected decline in its birth rate over substantial improvement. With absorption totaling 2.1the next 10 years, according to the California million sq. ft., vacancy fell from 15.5% at year-end 2010Department of Finance. Furthermore, the city’s large to 11.2% at year-end 2011. Solid demand pushed thefinancial sector leaves it vulnerable to negative effects market’s average asking lease rate up to $38.40 per sq.from increasing regulation and Europe’s sovereign ft. at year-end 2011 from $31.33 at the end of 2010,debt crisis. representing a 23% increase.Currently, San Francisco maintains the lowest office The outlook for San Francisco is positive through thevacancy in the western United States.1 As the tech medium-term, barring any major exogenous shocks,sector in San Francisco continues to thrive, it is creating especially through financial channels. Strong demandrobust demand for office space, particularly Class B for office space will ensure continued positive absorption,product that tech firms tend to gravitate toward. bringing vacancy down. With steady demand and fallingDemand from tech firms is providing an effective vacancy, lease rates can be expected to increase duringcounterbalance to sluggishness in financial services. 2012. Future performance in San Francisco’s officeAlmost 20% of all jobs in the Bay Area can be classified market will depend upon the tech industry. At theas part of the tech sector, and during the last quarter of present time, indicators are giving reason to be confident2011, tech-oriented tenants accounted for more than that the area’s office market will perform well in 2012.350% of demand for office space.2 Western U.S. Job Growth in 2011To the city’s benefit, a well-educated workforce and 2.1%presence as a global tech hub will create some Seattle -1.9% 1.6%gravitational pull and continue to attract firms both new 1.1%and established. According to analysis by the Phoenix 2.0% 1.5%California Department of Finance, the Bay Area 5.2% Salt Lake City 2.7%maintains the six most college-educated counties in the 3.6%state. San Diego -1.8% 2.4% 0.9%The Bureau of Labor Statistics (BLS) reported job growth 1.8% Los Angeles 0.3%in San Francisco for 2011 at 2.4% across all sectors, 0.5% 6.8%outperforming state and national averages. In sectors San Francisco -0.9% 2.4%related to office demand, job growth—although -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%mixed—was a net positive. Financial servicescontracted slightly at a rate of 0.9%. Meanwhile, Professional & Bus Svcs Financial Svcs Total Job Growth Source: Bureau of Labor Statisticsprofessional and business services grew at a robustrate of 6.8% in 2011. Due to its prominence in the Los Angelesarea, the importance of a healthy tech sector cannot be The economic recovery in Los Angeles can beunderstated. A healthy tech sector will also buoy other characterized as subdued. Employment data is especiallyprofessional and business services, further increasing important in Los Angeles, because without a concentrateddemand for office space. and thriving industry, such as tech or aerospace in1 CBRE North America Office Vacancy Index Q4, 20112 CBRE Viewpoint: Technology Sets the Pace in the San Francisco Office Market3 CBRE Research, San Francisco April 2012 Page 2 © 2012, CBRE
  3. 3. Western U.S. ViewPoint Seattle, the area depends on its large consumer base complicate its economic recovery and long-term growth to underpin the local economy. As employment prospects. growth remains sluggish, it will continue to restrain Over the medium-term, several planned multi-billion- LA’s economy from growing at a faster rate. dollar public investments will boost the local economy By percentage, job growth in America’s second- and improve infrastructure, including an underground largest city was the lowest of six metros in this report. light rail system in downtown Los Angeles, facility According to the BLS, LA registered job growth of just improvements at LAX and Port of LA, convention center 0.5% for 2011. In office-using sectors, financial expansion and a new NFL football stadium.4 Such services grew slightly at 0.3%, while professional and investments will provide short-term support for the local business services expanded by 1.8% in 2011. economy and ensure a viable future for international Difficulties in the labor market are reflected in both trade, which is a stabilizing and important component sluggish growth and current unemployment levels. of the metro area’s economy. At 11.6% in December 2011, unemployment in Los Due to its exposure to international trade, Los Angeles Angeles was 40 basis points higher than the state benefitted as flow volumes recovered after the average and 3.1 percentage points higher than the recession. However, any dramatic slowdown in the national average. global economy as a result of Europe’s sovereign debt Western U.S. Population Growth % Change 2000-2010 crisis, or sustained energy prices at highly elevated levels, would deal a blow to the area’s economy. Seattle 11.2% It should be noted that improvements to the Panama Phoenix 24.2% Canal will be complete in 2014 and allow cargo to beSalt Lake City more economically shipped directly from Asia to the 14.6% east coast. This is a significant development to San Diego 10.0% monitor, because ports in the LA metro support an estimated 500,000 jobs. While improvements to ports Los Angeles 3.1% will help maintain a competitive edge of speed relativeSan Francisco 3.7% to east coast destinations, disputes regarding improvements are slowing enhancement projects. Such 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% developments must be monitored closely to understand Source: 2010 U.S. Census for counties of each metro area. how the Panama Canal improvements will ultimatelyDemographics in the city paint a mixed picture. On affect the southland.5the positive end, LA’s population increased by 3.1% The Los Angeles office market experienced positivefrom 2000 to 2010, according to the U.S. Census absorption of almost 686,000 sq. ft. during 2011,Bureau. However, vulnerabilities that need to be meanwhile vacancy held steady at 17.6% from year-addressed come from the high cost of doing business end 2010 to year-end 2011. At 17.6%, office vacancyand low levels of education attainment, which will 4 Moody’s Analytics 5 The Economist: “California’s Ports: The fickle Asian container” April 2012 Page 3 © 2012, CBRE
  4. 4. Western U.S. ViewPointin Los Angeles surpasses both western and national Western U.S. Net Absorption Rates (%)averages last reported to be 17.3% and 16%, 6.00%respectively.6 Meanwhile, average asking lease rates 5.00%remained unchanged at $29.76 per sq. ft. Although 4.00%indicators are showing some improvement in the LA 3.00% San Francisco 2.00%office market, it is struggling. Large tenants continue Los Angeles 1.00% San Diegoto shed space, with smaller to mid-sized firms driving Phoenix 0.00%most of the recent gains.7 -1.00% Salt Lake Seattle -2.00%Interestingly, the Santa Monica submarket in the LA -3.00%metro stands out and will continue to outperform the -4.00%rest of the market. Not surprisingly, tech companies 2007 2008 2009 2010 2011 Source: CBRE Researchare driving growth there. Santa Monica continues toattract attention and is home to names such asGoogle, Facebook and Yahoo. Current vacancy in presence of such industries in San Diego will be bolsteredthe submarket is 9.4%, well below the metro average by a 50% increase in startups compared to the first half ofof 17.6%. 2011. Additionally, Johnson & Johnson will open a biotech and health IT innovation center in 2012. 8In the broader Los Angeles market, office demand willremain sluggish through the short-term. In the public sector, a heavy defense presence does poseConsequently, absorption will remain subdued, but is some risk to the area’s economy. However, with theexpected to remain positive. Vacancy is expected to Obama Administration’s renewed focus on the Asiaslowly decline, aided by restricted new supply. Pacific region, San Diego’s naval base will likely shieldHowever, lease rates both asking and effective are the area from painfully deep defense cuts. Furthermore,stabilizing and are expected to remain stable demand for Northrup Grumman’s unmanned aerialthroughout 2012. vehicles is supporting the company’s growth in the area.9Los Angeles will struggle more than other markets to BLS data indicates job growth in San Diego was subduedmake progress toward a healthy supply-demand at 0.9% in 2011. In sectors related to office demand,balance and the timing of such a development financial services contracted by 1.8%, and professionalextends into the medium-term. and business services expanded by 2.4% over the same period.San DiegoGeneral economic conditions and office market Indicators for future growth are also encouraging. Sanindicators in San Diego are continuing to improve. Diego’s demographics are favorable and will supportThe local economy is benefitting from healthy tech future growth. The U.S. Census Bureau reports theand R&D sectors. Furthermore, the long-term county’s population grew by 10% from 2000 to 2010.6 CBRE North America Office Vacancy Index Q4, 20117 CBRE Research, Los Angeles8,9 Moody’s Analytics April 2012 Page 4 © 2012, CBRE
  5. 5. Western U.S. ViewPointAdditionally, population growth is positive and education Salt Lake Cityattainment in San Diego is above the average of cities Salt Lake continues to attract the attention of premierprofiled in this report.10 companies such as Adobe, eBay, Electronic Arts, Goldman Sachs and Twitter. Notably, Goldman’sSan Diego experienced positive absorption over the last office in Salt Lake City is now the firm’s secondnine consecutive quarters. During 2011, positive largest in the Americas and projected to become itsabsorption totaled 907,316 sq. ft. Consequently, fourth-largest globally.11vacancy fell from 19.1% at year-end 2010 to 16.6% atyear-end 2011. San Diego’s vacancy is 70 basis points Meanwhile, a developing tech corridor extendingbelow the regional average, but still 60 basis points from the southern portion of Salt Lake County alongabove the national average. Market-wide average I-15 to northern Utah County is drawing the attentionasking lease rates increased almost 3% going from of reputable tech firms and spurring demand for$24.24 per sq. ft. at year-end 2010 to $24.96 at the end office space. This trend will only be bolstered byof 2011. startups from the University of Utah and Brigham Young University (BYU). In 2011, The Association ofWestern U.S. Average Lease Rates (FSG) University Technology Managers ranked the $45.00 University of Utah as number one in the U.S. for $40.00 most tech startups, followed by MIT and BYU taking $35.00 third place. $30.00 Salt Lake benefits from a diverse economy, healthy $25.00 demographics, and a low cost of doing business. $20.00 Furthermore, prudent fiscal management allowed $15.00 state and local governments to avoid painfully deep San Francisco $38.40 Salt Lake City $19.12 Los Angeles $29.76 San Diego $24.96 spending cuts from being implemented as less-than- Phoenix $20.75 $10.00 Seattle $28.13 $5.00 optimal revenues pushed governments elsewhere $0.00 toward austerity. Source: CBRE Research BLS data shows Salt Lake experienced healthy jobWith an encouraging economic outlook, absorption growth during 2011, well above the national averageis expected to remain positive through 2012. at 3.6% across all sectors. In office-related sectors,Looking ahead, with healthy absorption rates, financial services grew at 2.7%, and professional andvacancy will fall in the San Diego market as new business services at a brisk 5.2% during the samesupply remains restricted. Meanwhile, lease rates will period. Utah’s largest metro and capital cityremain stable due to ample supply. Overall, the maintain a young and educated workforce, which willoutlook for the near-term is stable, with healthier continue to attract employers. Furthermore, in-growth rates returning over the medium-term. migration and high birth rates are demographic advantages that will bolster long-term growth.12 10 CBRE Mapping Center 11 Bloomberg Businessweek: “Salt Lake City’s Lure” 12 Moody’s Analytics April 2012 Page 5 © 2012, CBRE
  6. 6. Western U.S. ViewPointAs a result of healthy job growth and improving 2012. Difficulties in housing and a sluggish laboreconomic conditions, positive absorption totaled market are restraining consumption and subduing652,381 sq. ft. during 2011. Positive absorption growth in the local economy.14brought vacancy down from 17.1% at year-end2010 to 15.3% at the end of 2011. Average asking Although Phoenix will experience a drag fromlease rates fell from $19.54 per sq. ft. in Q4 2010 to housing and the current employment picture is$19.12 at year-end 2011. difficult, long-term prospects give reason to be optimistic. The metro area’s low business costs andAlthough positive absorption is expected to continue, young-educated workforce will enable future growth.the rate of improvement in vacancy experienced Industries that will provide long-term growth includeduring 2011 will not be maintained in 2012. professional and business services, healthcare,Additional space from both new construction and renewable energy, and tech.15large users moving to dedicated single-tenant officebuildings will heavily influence market indicators. As Western U.S. Historical Unemployment Ratessuch, vacancy will stabilize on a market-wide basis 14.0%and climb in select submarkets, particularly 12.0%downtown. Lease rates are expected to remainunder pressure, but will trend toward stabilization, 10.0%with isolated increases in areas as demand continues San Francisco 8.0% Los Angelesto be somewhat subdued and new supply enters the San Diegomarket. However, over the medium-term, market 6.0% Salt Lake City Phoenixdynamics will improve and allow for rental rate 4.0% Seattlegrowth, absent any external shocks. 2.0%Phoenix 0.0%At year-end 2011, Phoenix registered the highest 2007 2008 2009 2010 2011 Source: Bureau of Labor Statisticsvacancy rate in the western United States.13 Overall,office vacancy in Phoenix ranks third-highest in the Overall job growth in Phoenix was 1.5% during 2011U.S. behind Detroit and Palm Beach County, according to the BLS. In office-using sectors,respectively. However, the area’s office market is financial services experienced growth of 2.0%, whilerecovering. professional and business services expanded by 1.1% over the same period.Phoenix is a market that maintains a tremendousamount of potential, but continues to underperform. Absorption increased from 233,670 sq. ft. for 2010Distress sales will continue to weigh on the metro to 1.9 million sq. ft. in 2011. Consequently, vacancyarea’s housing market and higher than average fell nearly one percentage point from 26.2% at year-foreclosures will continue to push prices down in end 2010 to 25.5% at year-end 2011. However, due to an over-abundant supply of office space,13 CBRE North America Office Vacancy Index Q4, 201114, 15 Moody’s Analytics April 2012 Page 6 © 2012, CBRE
  7. 7. Western U.S. ViewPointaverage asking lease rates went from $21.77 per sq. ft. As a market without major issues in residential realat the end of 2010 to $20.75 at year-end 2011. estate and industries with high wages and continuing growth potential, Seattle’s office market willLooking ahead, due to improving local dynamics, outperform national averages over the medium-term,positive absorption is expected in 2012. As new barring any major shocks to the economy.20 Due toconstruction remains confined to one new 92,000-sq.- a highly educated workforce and industries that willft. building in southeast Phoenix, restricted new supply play an integral role in global economic growth, thewill allow vacancy to fall.16 Lease rates are stabilizing, future for Washington’s largest metro gives muchboth asking and effective as landlords are offering reason for optimism through the medium-term.fewer concessions. Although improving, a healthysupply-demand dynamic will not return to Phoenix Growth in 2011 was primarily driven by techduring the short-term. companies. Within the tech category, it is also worth noting that Amazon is the largest tenant in the Seattle market. Within the next six months, Amazon willSeattle occupy approximately 2.7 million sq. ft. in Seattle, upSeattle is a city well-positioned for the 21st century. The from 1 million sq. ft. just three years ago.Seattle metro area boasts a concentration of aerospace Underlying growth trends are less impressive;and software companies that are able to compete in however, with such explosive growth, Amazon isand export to global markets. Boeing’s assembly lines essentially turbo-charging market indicators inwill remain busy for years as U.S. airlines replace their Seattle.21aging fleets, emerging market demand increases andfuel costs drive airlines toward newer, more efficient At 17.9%, Seattle’s office market vacancy is 60 basisaircraft. Boeing’s impact is significant due to points higher than the western region average ofsubstantial economic multipliers associated with 17.3%. However, the market experienced positiveaerospace manufacturing.17 absorption over the last seven quarters. Positive absorption for 2011 totaled just over 1.9 million sq.In addition to aerospace, software companies are ft., bringing vacancy rates down to 17.9% at year-growing and returned to their prerecession employment end 2011 from 19.1% at year-end 2010.levels. 18 Of the six metro areas examined in thisreport, Seattle metro maintains the highest level of Absorption is expected to remain positive andcollege education attainment.19 Consequently, continue bringing vacancy down. Average askingbusinesses are drawn to the area’s workforce. lease rates will begin to stabilize and remain stable, with increases isolated to a few propertiesAccording to BLS data, job growth across all sectors in experiencing low vacancy. As 2012 progresses,Seattle was 1.6% for 2011. Office-using sectors were incremental increases in asking and effective ratesmixed, with financial services contracting by 1.9% and can be expected.professional and business services expanding by 2.1%,offsetting weakness in financial services.16 CBRE Research, Phoenix17, 18, 20 Moody’s Analytics19 CBRE Mapping Center21 CBRE Research, Seattle April 2012 Page 7 © 2012, CBRE
  8. 8. Western U.S. ViewPointConclusionWhen looking at current and expected performance in the western U.S., demographics, tech, and housingare shaping the landscape. Metro areas with young and educated workforces attract modern industry, ableto compete in the global economy. Office demand will outperform national averages in such areas.Overall, San Francisco, Salt Lake City, Phoenix and Seattle maintain the highest potential for above-trendgrowth. Metro areas in Southern California, while improving, will struggle with less-favorable demographicsand an absence of concentrated industries able to drive growth in the near-term.While conditions in each metro area will affect future performance, it is important to note external influencesas well. Rising fuel prices, driven by geo-political issues, particularly relating to Iran’s nuclear ambitions areof great concern. Additionally, threats of contagion will plague the financial system as Europe’s sovereigndebt crisis grinds on. Domestically, fiscal and tax policy maintain the potential to adversely affect the U.S.recovery as policymakers grapple with how to address expiring Bush tax cuts and automatic budget cuts.Worst-case scenarios are not expected during the short-term, but external risks must be taken seriously andneed to be monitored. While recent economic data in the U.S. is encouraging and resilient, uncertainty willcontinue to temper the outlook.FOR MORE INFORMATION, PLEASE CONTACT:Darin MellottSenior Research Analyst801.869.8014darin.mellott@cbre.comAsieh Mansour, PhD.Head of Research, Americas andSenior Managing Director, Global Research415.772.0258asieh.mansour@cbre.comTwitter: @AsiehMansourCRE Data Disclaimer: Unless otherwise noted, all market data provided by local CBRE research departments. References to the San Francisco market are specific to the CBRE downtown office reporting area. All references to absorption refer to net absorption. Lease rates represented are annualized Full Service Gross (FSG). © Copyright 2012 CBRE Statistics contained herein may represent a different data set than that used to generate National Vacancy and Availability Index statistics published by CBRE Corporate Communications or CBRE’s research and April 2012 econometric forecasting unit, CBRE Econometric Advisors. Information herein has been obtained from sources believed reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation Page 8 about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the market. This information is designed exclusively for use by CBRE clients, and cannot be reproduced without prior written permission of CBRE. © 2012, CBRE