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Date: 9/15/2014

Contact: Alexis Fermanis

Employment Growth Drives Expansion in All Markets in Second Quarter

Washington, D.C. - Members of the Society of Industrial and Office REALTORS® (SIOR) participated in the Commercial Real Estate Index survey, supplying their knowledge of the industrial and office market conditions in the United States for the second quarter of 2014. The responses, given by SIOR members, compiled by SIOR in association with the National Association of REALTORS® (NAR), present an accurate depiction of the current industry for the middle of 2014. 

Office and industrial markets experienced an upbeat in the second quarter; with the SIOR Commercial Real Estate Index increasing 9.7 points, moving from 98.6 to 108.3, putting the CREI over what is considered a balanced market at 100 points, for the first time since third quarter of 2007. The SIOR Index measures ten variables pertinent to the performance of U.S. industrial and office markets (see methodology). 
 
Leasing improved: 46 percent of respondents felt that leasing activity in their market is higher than historic levels; 21 percent found leasing in line with averages, while 33 percent found leasing below normal (compared with 41 percent last quarter).

Rents continued rising: only 6 percent of respondents felt that asking rents are below where they were one year ago (6 percent last qtr.); 94 percent feel that asking rents are in line with or slightly above long-term averages.

Subleasing availability declined—only 8 percent felt that there is ample sublease space available, compared with 7 percent last quarter; 56 percent considered subleasing to have a small influence on the market.
 

Fundamentals improved—vacancies continued declining: 10 percent of respondents thought that vacancy rates are higher than a year ago; 13 percent contend they are the same and 78 percent say they are lower (69 percent last quarter).

In terms of tenant concessions, the focus is shifting away from the tenant—38 percent felt that tenants were benefiting from moderate concessions to deep discounts to rents (48 percent last qtr.); 34 percent of respondents found a market in normal negotiating balance; 28 percent thought the market favored the landlord.

Construction activity is improving—26 percent indicated rising new construction; 12 percent found development close to historical averages; 29 percent of respondents indicated levels lower than normal, and 33 percent mentioned that there is no new commercial construction in their market.

On the investment side, prices were below construction costs in 50 percent of the markets, compared with 65 percent last quarter; prices were above cost in 26 percent of the markets.

In terms of development acquisitions, the markets are changing—it was a buyer’s market according to 33 percent of respondents (41 percent last qtr.); 35 percent found it a balanced market, while 32 percent experienced a seller’s market (24 percent last quarter).

National economy continued to impact local economies, but at a diminishing rate—33 percent of respondents felt that the national economy is having a negative impact on their local market (43 percent last qtr.); 30 percent felt that the national economy was having a positive impact on their markets.

Local economies are impacting real estate markets at a receding pace—17 percent of respondents feel that their local economy is slowing or contracting, compared with the 27 percent from last quarter. Meanwhile, 44 percent considered that the local economy is strong and improving (32 percent last quarter).

When asked about the outlook for the next three months, participants pointed to a leveling market—3 percent indicated that business was going to be down from current levels, while 21 percent of respondents felt the market will be maintaining the current level during the next three months, and 76 percent pointed to expected improvement in the market.

Office Market
Office and industrial sectors improved second quarter. With positive employment growth, the demand for office spaces posted solid gain; the office index rose 10.4 points, to a value of 99.5.

Industrial Market
The industrial sector continued advancing, gaining 8.2 points to a value of 113.4. The industrial index has been positively above the 100-point threshold for the past 3 quarters, signifying an expanding market and notching noticeable growth as increased trade and retail sales supported demand for warehouses.

Regional Breakdown

The South
Regionally, all four main regions posted gains. The second quarter marked the period in which all four regions crossed above the 100-point mark, signifying market expansion.

The South provided the strongest gain, as the index increased 13.2 points to a value of 113.6—the highest of all regions.

The West
The West region posted a 5.8 point advance, closing the quarter with the third best index value of 104.6.

The Midwest
The Midwest had the second highest index value—112.5—following a 9.3 point rise.

The Northeast
The Northeast posted an index of 100.7, the result of a 7.5 point advance in market conditions.

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Methodology
The SIOR Commercial Real Estate Index is constructed as a “diffusion index,” a very common and familiar indexing technique for economic measures. Other examples of diffusion indexes include the Index of Leading Economic Indicators, the Consumer Confidence Index, and the Institute of Supply Management’s Purchasing Managers’ Index. In the SIOR Commercial Real Estate Index, a value of 100 represents a well-balanced market for industrial and office property. Values significantly lower than 100 indicate weak market conditions; values significantly higher than 100 indicate strong market conditions. The theoretical limits of this Index are a low of zero, and a high of 200, though it is unlikely that such limits would be approached as long as the property markets are operating efficiently.

The Index is based on a survey questionnaire with ten topics. The topics covered are (1) recent leasing activity; (2) trends in asking rents; (3) trends in vacancy rates; (4) subleasing conditions; (5) levels of concession packages in leases; (6) development activity; (7) site acquisition activity; (8) investment pricing levels; (9) the impact of the local economy on the property market; and, (10) the effect of the national economy on the property market. Survey respondents are given five choices. For each topic, five choices are provided, corresponding to conditions that are very weak, moderately weak, well-balanced, moderately strong, or very strong.

For each question, answers are tallied and the percentage of responses for each of the five choices is calculated. If survey panelists indicate “very weak” conditions (the “a” choices in the questionnaire), the answer is assigned 0 (zero) points; “moderately weak” (“b” answers) earn 5 points; an indication of “market balance” (“c”) receives 10 points; “moderately strong” indications (“d”) score 15 points; and “very strong” (“e”) responses receive a maximum 20 points. Thus a score of 10 for a given question can be earned if responses are evenly distributed across all five choices, if all responses were “c”, or if the answers form a “bell-shaped curve” centered around the “c” choice. The total index value is derived by summing the scores for all ten questions. Index values for each of the two property types are similarly calculated.

The survey was developed by Hugh F. Kelly, CRE, clinical professor at New York University, who worked with SIOR on research projects since 1989.

Headquartered in Washington, D.C., the Society of Industrial and Office Realtors® (www.sior.com) is a global professional organization that certifies commercial real estate service providers with the exclusive SIOR designation. Individuals who earn their SIOR adhere to the highest levels of accountability and ethical standards. Only the industry’s top professionals qualify for the SIOR. Today, there are 3,000 SIOR members in 640 markets in 31 countries.





Headquartered in Washington, DC, the SOCIETY OF INDUSTRIAL AND OFFICE REALTORS (SIOR, www.sior.com) is a global professional organization that certifies commercial real estate service providers with the exclusive SIOR designation. Individuals who earn their SIOR designation adhere to the highest levels of accountability and ethical standards. Only the industry’s top professionals qualify for the SIOR designation. Today, there are more than 3,000 SIOR members in 630 cities in 34 countries.

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