PRESS RELEASE DETAIL


Jul 12, 2012

CoStar Group: Rising Demand for Office and Industrial Real Estate Suggests Expanding U.S. Economy

WASHINGTON, DC – July 12, 2012 – Encouraging signs in the commercial real estate market, specifically in the office and industrial sectors, suggest an expanding U.S. economy. However, according to CoStar Group’s midyear 2012 market reports, the recovery is likely to be slow and dependent on the rate of employment growth.

WASHINGTON, DC – July 12, 2012 – Encouraging signs in the commercial real estate market, specifically in the office and industrial sectors, suggest an expanding U.S. economy. However, according to CoStar Group’s midyear 2012 market reports, the recovery is likely to be slow and dependent on the rate of employment growth.

Net absorption of office space totaled 16 million square feet in the second quarter of 2012, exceeding the historical average of 11 million square feet per quarter. The industrial market absorbed 35 million square feet of space in the second quarter of 2012, exceeding the historical average of 21 million square feet per quarter. Both the office and industrial figures represent a more than 50% increase from the first quarter of 2012.

In contrast, the retail sector grew by a mere 3 million square feet of net absorption by the close of the second quarter of 2012—the lowest level since the recession in 2009 and drastically lower than the historical average of 21 million square feet per quarter. 

Vacancy rates fell year-over-year for all of the major property sectors, due in part to relatively low levels of net completions.  Specifically, industrial vacancy is down 70 basis points, to 9.3%; office vacancy is down 60 basis points, to 12.8%; and retail vacancy is down 30 basis points, to 7%.

Rental rates were fairly flat for all property sectors, except that office and industrial rental rates were slightly positive and retail rental rates continued a 15-quarter trend of decline.

Office

The decline in the national office vacancy rate to 12.8%—along with the prospect of future vacancy declines—suggests that the scales are tipping toward generating office rent growth. So far, however, the growth has been very minor at a +1.4% annual rate as of the end of the second quarter of 2012.

Nationally, second quarter 2012 office net absorption grew at 16 million square feet, up from 10 million square feet in the first quarter of 2012 and more than doubled the pace of absorption in the second quarter of 2011. 

The 50 million square feet of office space currently under construction is roughly half the historical average, and construction is expected to remain below average, largely due to depressed office rents. CoStar estimates that nationally, office rents are 7% below the level that would normally entice developers to justify new construction.

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Indicating the broad base for the office market recovery, vacancy for all of the top markets except Washington, DC, declined in the second quarter of 2012 on a year-over-year basis.

The greatest drops in vacancy were concentrated in technology-dominated markets:

  • San Jose - 2.9%
  • Austin - 2.5%

In contrast, new construction deliveries and below-average demand in metro Washington, DC resulted in a 20-basis-point increase in vacancy, to 13.4%.

Of the largest U.S. office markets, San Francisco had the largest rental rate growth in the second quarter of 2012, at 16% year-over-year.

Industrial

Industrial sector vacancy declined 20 basis points to 9.3% in the second quarter of 2012, due in large part to only four million square feet of net completions. Net absorption at 35 million square feet, was more than 60% above the long-term quarterly average and up sharply from 19 million square feet in the first quarter of 2012.

Industrial rents grew for the third straight quarter, although the national industrial rental growth rate has yet to exceed 1% annually.

There is 38 million square feet of industrial construction currently under way. This amount is only 12% of the long-term average and should result in future occupancy and rent gains, as demand continues to increase with little corresponding increase in supply.

  

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The lowest industrial rates and markets include:

  • Houston at 5.1%
  • Los Angeles at 5.1%
  • Seattle at 6.3%
  • San Francisco at 7%
  • Miami at 7.1%

Lower-cost national distribution markets had the highest net absorption rates, including:

  • Chicago at 5.8 million square feet
  • Dallas at 4.3 million square feet
  • Philadelphia at 2.8 million square feet
  • Phoenix at 2.5 million square feet

Indicating a broad recovery, year-to-date net absorption is positive for each of the top industrial markets, all of which recorded year-over-year vacancy declines.

 

Retail

Retail is currently the outlier.  Demand for space in the retail sector was at its lowest level since 2009. With only 3 million square feet of net absorption for the second quarter of 2012, retail is well below the long-run average of 21 million square feet of net absorption per quarter.

The low, but positive level of demand in the retail sector most likely reflects a combination of factors, including increased Internet shopping, aging demographics, loss of retail demand from earlier spikes in energy prices, and weakened spending among lower-earning consumer groups.

Retail vacancy remained flat during the second quarter of 2012 at 7% in-part because there was only 6.5 million square feet of new construction.

Retail rental rates continue to show negative trends, with rents declining at an annualized rate of 1.6%.  Of more significance is the fact that retail rents have declined every quarter since the third quarter of 2008, compared to slight rent recoveries for office and industrial during the same period.

In-process new retail construction hit a new low of only 26 million square feet in the second quarter of 2012, suggesting that retail construction will most likely continue to decline. 

  

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At the metro level, retail performance varied across the country more than performance for the other property types. Market vacancy change over the past year was generally down, with San Jose (-0.8% to 5.3%), Dallas (-0.7% to 8.6%) and Austin (-0.6% to 5.4%) showing the best improvement. 

In contrast, roughly one-third of the markets recorded negative net absorption, suggesting that the retail recovery is still weak. Market vacancy ranges from 2.8% in San Francisco to 11.8% in Phoenix.

 

About PPR

Property and Portfolio Research (PPR) provides unparalleled expertise and objective thinking in analyzing and forecasting commercial real estate markets. PPR sets the pace in offering independent research, a unique set of analytic tools, and actionable insights to commercial real estate investors on hundreds of global markets in North America, the UK and Europe. Clients range from commercial banks and financial institutions to pension funds and insurance companies, as well as government and rating agencies.

With a dedicated commitment to providing the best in commercial real estate research, PPR's widely respected knowledge of the markets allows clients to stay ahead of market trends, act decisively, and feel confident about their investment decisions. PPR is a division of CoStar Group.

 

About CoStar Group, Inc.

 

CoStar Group (NASDAQ: CSGP) is commercial real estate's leading provider of information, analytics services and marketing. Founded in 1987, CoStar conducts expansive, ongoing research to produce and maintain the largest and most comprehensive database of commercial real estate information. Our suite of online services enables clients to analyze, interpret and gain unmatched insight on commercial property values, market conditions and current availabilities. Through LoopNet, the Company operates the most heavily trafficked commercial real estate marketplace online with more than 5.8 million registered members and 3.6 million unique monthly visitors. Headquartered in Washington, DC, CoStar maintains offices throughout the U.S. and in Europe including the industry's largest professional research organization. For more information, visit www.costar.com.


This news release includes "forward-looking statements" including, without limitation, statements regarding CoStar's expectations, beliefs, intentions or strategies regarding the future. These statements are based upon current beliefs and are subject to many risks and uncertainties that could cause actual results to differ materially from these statements. The following factors, among others, could cause or contribute to such differences: the risk that the trends represented or implied by the indices will not continue or produce the results suggested by such trends; the risk that the U.S. economy is not expanding or will not continue to expand in the foreseeable future; the possibility that the market recovery will not be as stated in this release; the risk that the industry will not realize office rent growth as stated in this release; the possibility that office space construction will not remain below average; the risk that the relatively lower levels of industrial construction will not result in future occupancy and rent gains as demand increases; the possibility that retail construction will not continue to decline; and the risk that demand and rental rates will not continue at the levels or with the trends indicated in this release. More information about potential factors that could cause actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to, those stated in CoStar's filings from time to time with the Securities and Exchange Commission, including CoStar's Annual Report on Form 10-K for the year ended December 31, 2011, and CoStar's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, under the heading "Risk Factors" section of each of these filings. All forward-looking statements are based on information available to CoStar on the date hereof, and CoStar assumes no obligation to update such statements, whether as a result of new information, future events or otherwise.

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