At the top of Grubb & Ellis’ most recent Office Trends Report for the Madison market, the headline blares what has become a familiar and sometimes exhausting refrain for the business community: “Half Speed Recovery Continues.”
Things are better in the office market – as they are in real estate and the economy in general – but we’re far from the gaudy, champagne-popping metrics that many had expected and everyone had hoped for.
Grubb & Ellis’ closely watched report notes that past recessions have been followed by quicker and steeper recoveries in the office market, most recently in the downturn following 9/11:
“In the recession years after 9/11, vacancy rose to 15.3 percent in 2003 but Madison’s office market bounced back quickly and vacancy plunged to 10.9 percent two years later, a difference of 440 basis points. When compared to the current recession and recovery cycle when vacancy peaked at 17.3 percent in 2009 and, two years later, the rate is only down 160 basis points, it’s easy to see why we refer to this as a half speed recovery. In fact, half speed may actually be generous.”
Hoping to get a bit more insight into the current (and future) state of the Madison office market, we contacted Christian Caulum, senior real estate associate with Grubb & Ellis in Madison.
In your Fourth Quarter Office Trends Report, you noted that vacancy in the Madison market dropped from 16.2% to 15.7% – an improvement, but not a dramatic one. Why do you think the numbers were worse than expected?
We expected more robust economic growth, which results in more jobs and (after a lag period) then translates into more demand for office space.
You note that the vacancy rate is still discouraging new development. What do you think the threshold might be where we start to see a real resurgence in new construction projects?
The key metric to look at in this regard is class A space, and until that tightens up a bit more, we won’t see widespread new development.
A couple submarkets have class A vacancy low enough to see some near term new construction, including the far west side. Class A vacancy is low enough downtown for new construction, but approvals, TIF, and structured parking result in a much longer time frame from concept to construction there.
What little new development we are seeing is for tenants like Spectrum Brands who want or need to move but, due to their large size or other requirements, have few if any existing buildings as options.
Interestingly, due to extremely low interest rates and government financing programs, a newly constructed building can sometimes be less expensive to lease than an existing building. This is likely a temporary dynamic, but it did influence a few recent projects.
Land sales appear to be particularly stagnant right now. You predicted a bounce-back last year, but it didn’t materialize. Any reason to think 2012-2013 will be different?
I wouldn’t say we predicted a bounce-back. In our Fourth Quarter 2010 report, we predicted that land sales would be less than average. Still, I didn’t think they would be zero. But yes, we had a few pending transactions we were working on when I wrote the land sales section of the report, so I confess that I had good reason to be confident. We also knew the Spectrum Brands deal would result in a land transaction.
Asking rents rose 1% in 2011 after falling modestly in 2010. Does this signal an overall recovery in the market?
I wouldn’t say that one year of data is indicative of anything on its own, but taken in context with all the other key metrics like vacancy, sublease space, and absorption, rents were the last to recover. Now that they’ve done so, I think it’s fair to say that we are firmly in recovery phase.
What’s your forecast for the Madison market?
Continued recovery. Slightly lower vacancy, especially in class A buildings and lesser so in class B and C, but still a positive trend. Rising rent, fewer concessions like free rent. Limited new construction, 150,000-200,000 square feet of positive absorption.
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