Offices and Apartments Are Dry-Market Oases
With the retail sector languishing, American developers are clinging to the renewed demand for construction of office and apartment buildings.
Providing modest relief, the sector movement is a result of converging market factors, including historically low vacancy rates in offices and a backlog in apartment units, as demand catches up to low levels of investment in recent years, developers say.
“There is a strong market in Washington, D.C., in particular, for opportunities to develop office properties,” says Jeff Linton, communications director and officer at New York City-based Forest City Enterprises Inc.
Linton sees pent-up demand from the vagaries of market forces and urban planning codes. For the past two years, he says, investors have been waiting out the recession. Also, building height restrictions in Washington, D.C., remain in effect. Both are creating demand in the city for office space, he notes.
Analysts say starts for offices began climbing in the second half of 2011 on historically low vacancy rates following the construction doldrums of the past three years, yielding growing demand for office space in major regional markets such as the D.C. area and New York City.
“At this point in the year, there has been more new leasing activity than we had at midyear 2006 and 2007, which were two extremely strong years,” says Maria Sicola, executive managing director and head of Americas research for New York City-based market anaylst Cushman & Wakefield.
“If activity continues at this pace, 2011 will be on track [to be] a historic year,” Sicola says. Cushman & Wakefield's midyear 2011 report for office markets shows the overall average office vacancy rate fell to 13.9 % from 14.6 % at the end of the first quarter of this year.
Markets in Miami, New York City and Washington, D.C., represent the strongest demand for new office projects. Sicola says the decline in vacancy rates is the result of new leasing activity, which is up 43.9 % from midyear 2010 levels with 42 million sq ft in new office leases signed so far this year.
Spurred by the low vacancy rates in the office market, new projects range from high-rise towers in the very fertile New York City and Miami markets to smaller mixed-use office development projects, such as Dallas-based Jackson-Shaw's $23-million Vista Point South, a 207,953-sq-ft complex in Coppell, Texas, consisting of six flex-office buildings.
“There is a significant amount of investor interest in a product like Vista Point South,” says Steve Golding, president and chief operating officer of Jackson-Shaw. Vista Point South is designed for maximum flexibility of use to accommodate diverse office tenants and changing market demands. Currently, in the highly competitive markets, he says, investors are looking for projects that are “well located, well designed and well constructed.”
Lenders Take Cautious Approach
Credit remains tight, but lenders and investors are moving on “well-sponsored projects in strong markets,” says Linton. After months of recession, lenders are willing to finance projects, but they require that “70% to 80% of leases be in place first,” he says.
Lack of financing and high vacancies killed speculative development during the past two and a half years, says Rene Circ, director of research for New York City-based real estate development analyst Grubb & Ellis.
“New speculative projects have been started in 2011 in a few markets, but the total square footage is not even a tenth of one percent of total inventory,” says Circ.
Growing demand this quarter for rental apartment buildings follows several quarters of sagging activity and a growing wariness among potential homeowners to take on mortgages in the present economy, says Linton.
New York State of Mind
Forest City's massive tower at Eight Spruce Street, New York City, an $875-million, 903-unit project, is nearly completed. The building represents one of the largest residential projects in the nation. Started more than four years ago, leasing is under way for the lower-level units of the 85-story, Frank Gehry-designed tower.
“[The units are] leasing out nicely because there is pent-up demand since 2008, when markets went down, and that's driving the current demand in New York for multifamily apartments,” Linton says.
The recession's dampening of mortgage lending has spurred “a subtle demographic change as we see a generation of potential homebuyers who are becoming renters by choice,” says Linton.
In the positive outlook for apartments, “we are clearly in a phase of the recovery where concessions are burning off and apartment owners can register real rent growth,” says Hessam Nadji, managing director of New York City-based analyst Marcus & Millichap.
The national apartment vacancy rate in the first quarter registered 6.2% and is projected to fall to 5.6% by the end of 2011. “In our estimation, the next three to five years for apartments will show the strongest rent growth of any recovery period that we have seen,” says Nadji.
The rental-apartment markets are relatively strong “despite the overhang of economic uncertainty, high unemployment and market volatility,” says David J. LaRue, Forest City president and chief executive officer, pointing to the firm's major projects currently under way. These jobs include a 220-unit apartment tower in Denver and mixed-use development anchored around the Barclays Center Arena in Brooklyn, N.Y.
The firm also has broken ground on several bio-tech projects, including an eight-building, 2.3-million-sq-ft bio-tech park at the Massachusetts Institute of Technology in Boston, and bio-tech projects in Baltimore, Skokie, Ill., and University Park, Pa.
The auto industry is keeping Jackson-Shaw busy this year. The company is developing a training-center complex for combined tenants Chrysler Group LLC and Nissan North America, Irving, Texas.
The centers are being built at a 52-acre, master-planned business park. Chrysler Group has signed a seven-year lease for 14,160 sq ft, and Nissan North America has signed a 10-year lease for a new 25,740-sq-ft training center, says Jason Nunley, vice president of development for Jackson-Shaw.
Tenants “will continue selecting high-quality projects regardless of the overall market conditions—which means there is always demand by large, multinational companies, such as Chrysler and Nissan, for fundamentally sound projects.”
Lagging Retail
Retail remains in the doldrums this fall, with few major retail development projects under way. An exception is Forest City's mixed-use, Yonkers, N.Y.-based retail development, an $842-million, 1.3-million-sq-ft project anchored by a Lord & Taylor department store. “There is not much activity at all in retail,” says Linton. “This project is one of the few … in the country.”
Forging into retail ventures now requires fortitude and the right opportunity, developers say, as exemplified by Chicago-based developer Cullinan Properties' reinvigorated the “Streets of Saint Charles” development project, located at St. Charles, Mo.
The $385-million project, which includes 100,000 sq ft of retail space, was held up for two years as lending dried up. However, it is now back on schedule for a mid-2012 completion, says Rob Wetherald, Cullinan development director.
“We kept this on track when other companies would have folded up their tents,” he says.
Another example of retail development is Costa Mesa, Ariz.-based developer Donahue Schriber's ambitious plan to construct a 23,600-sq-ft retail center in Rocklin, Calif. Rocklin's town council approved the development in October despite no pre-leased tenants. The project is set to break ground this fall.
The project, which will develop a five-acre parcel with four retail buildings, “was delayed by the economy, but it's time to start moving on it,” says Jan Peterson, vice president of development for Donahue Schriber.
“We are certainly not trying to 'build it and they will come,' but we are actively soliciting tenants' interest,” she says. n
