Real Estate Forum - October 2008

price of oil dropping, is still pretty strong.”

Ed A. Ayres, president of Houston Realty Advisors Inc., agrees leasing velocity in the Southwest metropolis is vibrant. “We are leasing a lot of space,” he says, “which is due to the oil and gas firms taking more space. And for every square foot of office space these firms take, in many instances the law, accounting and public relations firms that do business with those companies also expand.”

Yet there are indications that Houston’s office market may be taking a breather. Delta Associates reports that the vacancy rate edged up to 11.4% and absorption dropped sharply to 115,000 sf in Q3 as concerns over the future of the energy market have taken hold.

What’s more, Houston is still feeling the after-effects of Hurricane Ike. Ayres says that many tenants are in buildings without power, and he estimates that it will take another six months before the city gets back on its feet. Nevertheless, the storm damage has made commercial real estate even more valuable, he says. “We have hundreds of companies involved in the reconstruction looking for warehouse space, which has driven up the absorption in the past few weeks,” Ayres notes. “Tenants that were sitting on the fence, thinking that they are going to get a better deal have lost the space to these out-of-state companies.”

By the same token, cities with a strong base in information technology are also experiencing a healthy commercial real estate market.

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After the rocky years following the dot-com bust in the ’90s, the IT business has made a strong revival, says Ray Wong, director of Americas research operations for CB Richard Ellis. “With that sector coming back, it brings more sustained growth,” says the Toronto-based executive.

Of course, when one thinks of the IT industry, two cities that come to mind are Boston and Seattle. “Boston has a huge educational backbone and technology is driving the economic performance of the market,” says Stephen Hansen, managing director at ING Clarion in New York City. “It counter-balances the financial sector exposure there. We like that market.”

According to Q2 stats from CBRE, Metro Boston’s office vacancy stood at 11.3%, up slightly from the previous quarter’s 11.1%, but below the 12.2% recorded a year earlier. The rate for Greater Seattle is in the same range, 11%, up from 10.7% in Q1 and 10.5% in Q2 ’07.

Other cities that are stable despite the economic downturn are those dependent on government and educational institutions, a category that would include Sacramento, Austin, TX and Washington, DC.

“Sacramento is the capital of the largest state in the US,” Hansen says. “So it tends to be a bit more stable because government and education are the drivers. We like Austin for the same reason. Texas is the second largest state in the country.”

As of the second quarter, Sacramento’s CBD had an office vacancy of 11.4%, with leasing expected to remain healthy through 2009, reports Cushman & Wakefield. C&W puts the Q2 rate for Downtown Austin at 14.7%, which will likely increase as new construction comes on line later this year.

As for Washington, DC, Finn contends that it is insulated from recessions—for obvious reasons. “People want to be close to the government in good and difficult times.”