Commercial Real Estate Revives As Tech, Energy Hiring Picks Up

Investor's Business Daily

With U.S. employment finally past the peak of the last economic cycle, some kinds of employers are taking on more office space. The thriving energy and tech sectors are leading the demand for office real estate, which is drawing in more foreign investors.

But commercial property's resurgence, like payrolls, has been uneven.

Commercial real estate "is recovering in a way that is healthy but varies wildly by segment," Auction.com Executive Vice President Rick Sharga said Friday at the National Association of Real Estate Editors conference in Houston. "Retail and office segments are kind of moving in slow motion," while "multifamily and hospitality segments are fully recovered," with industrial real estate in between.

"Tech and energy — we're seeing no slowdown in both of these sectors," said John Sikaitis, managing director of office and local markets research for real estate firm Jones Lang LaSalle (JLL), at the conference Thursday.

The San Francisco Bay Area, Texas and Sun Belt markets are seeing the strongest job growth, in some cases more than 4%, JLL notes.

Filling Up Desks

About 8.7 million jobs were lost in the recession and 8.8 million gained in the recovery.

JLL notes that while 1.7 million office jobs were lost, 2.8 million office jobs have been regained.

With some parts of the economy humming, the commercial property outlook is strong — a draw for international as well as domestic investors, according to several industry analysts.

"Right-to-work states are going to continue to do well, and wherever there are big economic growth drivers, that's where we're doubling down," said Chip Clarke, president of the Americas at commercial real estate firm Transwestern.

Clarke said Thursday that he's "very bullish" on U.S. commercial real estate.

Trey Odom, CEO of development firm Avera Cos., cited "strong fundamentals and a low vacancy rate — that kind of speaks to the industrial world.

"Keep your eye on mixed-use" real estate "and this fight for talent" in especially thriving parts of the work world, said Cassie Stinson, a real estate attorney at BoyarMiller in Houston.

U.S. office vacancy logged a 15.2% rate in the first quarter — flat vs. Q4, but that was as 10.5 million square feet of new office space was delivered, according to a Cassidy Turley report.

New office construction is picking up, says the commercial real estate firm, with 65.4 million square feet of space under construction at the end of Q1, up 31% vs. a year earlier.

And the value of office construction put in place rose 19%, reflecting "greater overall demand and remodeling activity," according to the report.

The Cassidy Turley report expects vacancy in the office sector to fall from 15.2% in the first quarter to 14.6% by mid-2015, while industrial vacancy pares from 8.3% down to 7% and retail ebbs from 10.4% to 10%.

In the office sector, it sees asking rents rising from $22.27 a square foot to $22.69 in that time.

New York, Houston, Dallas and Boston account for 37.5% of the office space being built, Cassidy Turley's report said.

Sikaitis said that while the energy sector awaits a Keystone oil pipeline decision from Washington that could "open up the energy sector in a way we haven't experienced for some decades," the tech sector awaits potential immigration policy changes that could boost the need for desk space.

Across America

Foreign investors are looking beyond the nation's top few markets for office properties, says Matt Khourie, CEO of CBRE Global Investors, the real estate investment management arm of commercial property giant CBRE (CBG).

It used to be "New York, San Francisco, Los Angeles and Boston," he said. "Chicago didn't even used to be on the list. It's gone from maybe four (markets) to maybe 10 or 12.

Sikaitis said a "ton of foreign capital and institutional capital" is still coming into class A and trophy properties.

The economic forecast for the next two to three years "is higher than it's been in some 7-1/2 years," he said, adding that it's a foundation for higher rents.

"Foreign capital is comfortable now investing money outside their domestic borders," Clarke said. Along with the Chinese, "Korean money is very comfortable here in the U.S. — they like yield and the low interest rates and the fact you can get a 6%-7% levered deal here.

About a year ago, he adds, those buyers started to broaden their view from top gateway U.S. markets to places such as Houston, Dallas and Seattle. And "everywhere we go we talk about Houston being a new gateway market.

"Gateway with an asterisk," Khourie said.

Houston, We Have A Boom

Texas has seen strong economic growth, supported by its booming oil and gas industry.

And Houston serves as a management center for energy companies with global operations.

BP (BP) has over 9,500 employees in the area's Energy Corridor and ConocoPhillips (COP) 2,600, according to EnergyCorridor.org.

ExxonMobil (XOM) is building a huge Houston campus that can house 10,000 employees.

Meanwhile, Silicon Valley supports more than 200,000 high-tech office and manufacturing jobs, according to JLL research. It sees more than a dozen tech hubs emerging around the U.S.

May jobs data show tech and energy hiring on the rise, while total nonfarm and office-using industries were steady, JLL notes in an analysis.

On foreign cash moving into U.S. commercial real estate, "you'll see more and more Australian money coming over here, and in Europe now that they've started their recovery you'll be seeing more German capital, French, Dutch," Khourie said.

Not all U.S. markets are hot prospects.

"We're very careful today when we buy office buildings as to what the industry is and the market and the submarket," Khourie said.

Counting Heads

"If it's energy, that's a good thing," he said, as tenants are taking about the same space per capita as they traditionally have. But "if it's a big law firm or accounting firms, consulting firms, they're shrinking" — getting by with 80% of the space for the same head count amid "densification trends.

"You may think you're buying a 90%-leased building, but three years down the road it can be the same tenants and 70% leased," he said.

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