SIOR COMMERCIAL REAL ESTATE INDEX
GAINS 5.5 POINTS FOR Q4 2012
February, 2013—WASHINGTON, DC— More than 206 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 for the fourth quarter of 2012. The responses, compiled by SIOR in association with the National Association of REALTORS® (NAR), present an accurate depiction of the current industry for the closing stages of 2012.
The SIOR Index rose noticeably during the winter 2012 quarter, gaining 5.5 points, from 75.6 to 81.1. A balanced market is signified by 100 points—something the U.S. has not experienced since third quarter 2007. The SIOR Index measures ten variables pertinent to the performance of U.S. industrial and office markets (see methodology).
Both the office and industrial markets showed increase across the board. The office markets recorded solid growth, rising 4.6 points to 75.1, up from 70.5 in October. Additionally, the industrial sector advanced another 6.0 points to 85.6, up from 79.6 in October. This was the sixth consecutive gain for the industrial market. While general national economic conditions registered a decline in activity due to unique factors, industrial and office markets continued to perform well during the quarter.
When asked about the outlook for the next three months, participants are pointing to a stronger market for the next quarter—nine percent indicated that business was going to be down from current levels, 22 percent of respondents felt the market will be maintaining the current level during the next three months, and 69 percent pointed to expected improvement in the market.
Fundamentals continue to improve as vacancies declined for the majority of SIORs. Only 14 percent of respondents think that vacancy rates are higher than a year ago as compared to 16 percent last quarter, while 26 percent contend they are the same and 59 percent say they are lower.
Construction activity is still low but there are signs of life in the market as 81 percent of respondents indicated levels lower than historical averages (88 percent last quarter). Fifty-five percent mentioned that there is no new commercial construction in their market and nine percent reported growing new construction.
The national market continues to impact local economies as 66 percent of respondents feel the economy is having a negative impact on their local market as compared to 78 percent last quarter.
Vacancy rates are lower than a year ago for most SIORs, while leasing improved, and rents rose.
Leasing activity has increased for office markets, but is still lower than industrial markets. Office space has higher vacancy rates. Rents for office properties, however, are now on par with industrial properties. Sublease space is about normal for both office and industrial but closer to historical averages in the industrial sector. Construction levels are no longer at a standstill, but certainly low for both sectors, with the office market registering lower values. Both industrial and office professionals feel that it is a buyer’s market, with prices falling more in the office sector. The prospects for the next three months are slightly worse for office practitioners. The national economy is clearly having a negative impact on the local markets, but more so for office practitioners.
Leasing activity was higher for industrial specialists than office specialists, and industrial specialists have lower vacancy rates. Sublease space is closer to historical averages for industrial properties. Both industrial and office professionals feel that it is a buyer’s market, with prices falling more in the office sector. Industrial practitioners are still clearly feeling the negative impact of the national economy on the local markets, but less so than office practitioners. Overall, the prospects for the next three months are slightly better for industrial practitioners.
The West (79.8, up from 71.4 in October) posted stronger levels of leasing activity, and is no longer the lowest-rated of the regions. Vacancy rates are continuing to decline from a year ago, and along with asking rents, are at about the historical averages. Sublease space is at normal levels, and declining. Low prices make the West a buyer’s market and development activity remains low. In terms of concessions, it continues to be a tenant’s market, with respondents in the West seeing higher levels than national averages. The national economy is still having a negative impact on the West. The outlook for the next three months shows expectations of slight improvement.
The South (86.7, up from 80.5 in October) has the best overall market conditions, with the highest rating, and posting another strong increase, at 6.2 points. Asking rents are higher than historical averages, especially in the south; and vacancy rates are showing declines from where they were a year ago, especially in the south. Sublease space is at normal levels and declining, more so in the South than in other regions. Development activity, consistent with the past few years, remains low. In terms of leasing activity, the south is inching toward long-term averages. Like the other regions, the South continues to be a tenant’s market, in terms of concessions. Low prices make the South a buyer’s market. Correspondents from the South believe that the national economy is having an impact on their markets. However, respondent from the South noted that the local economy is at historical norms. The outlook for the next three months shows expectations of slight improvement.
The Northeast (77.0, up from 74.1 in October) posted a slight gain. Both asking rents and vacancy rates are closing in on historical averages, with vacancy rates lower than they were a year ago. Development activity remains low, and sublease space is declining. In terms of concessions, it continues to be a tenant’s market. Low prices make the Northeast a buyer’s market. Respondents from the Northeast found that their local economy is much weaker than the national average. The short term outlook shows expectations of slight improvement.
The Midwest (79.3, up from 76.1 in October) posted another strong performance. Asking rents are now at historical averages, while vacancy rates are lower in the Midwest than in other regions. Sublease space is at normal levels and declining. The Midwest also finds themselves in a buyer’s market with the lowest prices of the regions existing in the Midwest; however, development activity remains low. In terms of concessions, it continues to be a tenant’s market, with respondents in the Midwest seeing higher levels. The weak national and local economy is still is of some concern to local markets, in the Midwest, yet the short term outlook shows expectations of slight improvement.
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.
SIOR is a global professional organization that certifies commercial real estate service providers with the exclusive SIOR designation, based on achievement, knowledge, accountability and ethical standards. Only the industry’s top professionals qualify for SIOR. Today, there are more than 3,000 members in 630 cities in 34 countries. For more information, visit www.sior.com.