King of Prussia, PA – (December 13, 2013) Jackson Cross Partners, a leader in Knowledge Based Real Estate, today reported on national and regional office and industrial real estate markets.
“Vacancy rates in our local office markets closely mirror national rates,” said John Morrissey of Jackson Cross Partners at their annual Real Estate Forecast Meeting at the Hotel DuPont in Wilmington, Delaware. “Class A office space nationally has a 12.8% vacancy rate, while in our region the vacancy rate is 12.3%. Class B office space has a vacancy rate of 12.3% and locally we are at 12.2%. As we look at average rental rates both nationally and locally, one fact stands out. Rental rates have not increased in years. There has been no discernible increase nationally in the past decade and the same is true in the last five years regionally.”
There is one significant difference between the national and regional numbers. The average sales price of office buildings is $222 per square foot nationally and locally that number is only $123. Morrissey explained that when looking at buildings currently under construction, it is safe to say that there is no risk of oversupply in the next year – in our local region or nationally. There are however a number of factors occurring that Morrissey said we need to be watching. “What I call densification is occurring everywhere in the nation. While a few years ago it was common to see an average of 250 square feet per employee, today it is not uncommon to see an average of 200 square feet per employee, and some plans are seeing the average square feet provided per employee as low as 125 square foot per employee. The impact of technology on office space design and usage is also something to keep our eye on. More and more companies are permitting their employees to work from home at least one or two days a week. Telecommuting is affecting office space use, and personally I have noticed, reduced automobile traffic volumes on Fridays and Mondays.”
Generation “Y” lifestyle changes seem to be contributing to the shift, with the design of more Live, Work, Play developments. There is a trend of increased development around transportation hubs with two prime examples in the Philadelphia area: The increased development around the new slip ramp of the Pennsylvania Turnpike at Route 29 and the CIRA II development located near 30th Street, which includes residential, retail and office components.
Morrissey added that “We are also seeing older office properties being re-purposed. For instance, in Center City Philadelphia in the past three years, five Class B office buildings have been redeveloped for residential or educational use. Another major occurrence in our region has been the sale by REITs of their non-core suburban office portfolios. Mack-Cali, Liberty Property Trust and Brandywine Realty Trust have announced the sale of or sold a total of 3.3 million square feet of suburban office buildings.”
On the industrial side, vacancy rates nationally stand at 8.3% and 9.2% regionally. Triple net rental rates are $5.31 per square foot nationally and $4.52 in the region. As was the case with office space, both national and regional industrial rental rates have seen little change for years. Current construction activity, both nationally and regionally, is at relatively low levels and points to a continued slow decrease in vacancy rates. Additional speculative construction is expected in 2014 and 2015.
The industrial market is hot. There is solid demand for institutional grade industrial product. E-commerce is having an effect upon the industrial market since firms requiring “big box” logistic centers are interested in having modern facilities that are close to major population centers so that they shorten the supply chain and provide the opportunity for same day or next day delivery. Due to the specific requirements and the size of these facilities, most of these buildings need to be custom built. In the Northeast region, the areas that are seeing the most activity are along the I-81 and I-83 corridors.
Morrissey concluded that “As labor rates in China and other foreign countries rise rapidly, we are seeing more ‘re-shoring’ of manufacturing, and intermodal centers with port, air, rail and interstate highway access are ideal for these ‘re-shoring’ activities. Wilmington and Philadelphia should be able to capitalize on their location relative to all of these important requirements. The year ahead should be a good one for the industrial market both nationally and regionally. This asset class should continue to be favored by institutional investors. We should see a moderate increase in rental rates, declining vacancy and more spec construction.”
About Jackson Cross Partners
Jackson Cross Partners (JCP) is a multi-dimensional commercial real estate company that offers a unique resource to an organization’s real estate challenges. The company provides commercial property owners and occupiers with a broad range of services including Advisory, Brokerage, CRE Strategies, Investment and Property Management. With advanced skills and experience in Real Estate, Finance, Accounting, Technology and Law, JCP provides a cross functional approach to real estate planning, analysis and operational execution. The company, based outside of Philadelphia, PA, provides regional brokerage services in Pennsylvania, Delaware and New Jersey, while also providing advisory and strategic execution for client portfolios throughout North America and around the world. For more information, go to www.jacksoncross.com.