WASHINGTON, Aug. 20 /PRNewswire-USNewswire/ -- The Second Quarter 2008
SIOR Commercial Real Estate Index, compiled by the Society of Industrial
and Office Realtors (SIOR) in association with the National Association of
Realtors (NAR), indicated that commercial real estate markets have not yet
begun their rebound to market equilibrium. The national Index, which
measures 10 variables pertinent to the performance of U.S. industrial and
office markets, dropped for a sixth straight quarter to an overall total of
76.4 points. This point drop placed it 23.6 points below the 100 point
criteria that represents a balanced office and industrial marketplace and
43 points below its record high in spring 2006.
The SIOR Commercial Real Estate Index is a diffusion index (see
Methodology) where a score of 100 indicates markets in balance. A score of
76.4 reflects conditions that are significantly less favorable for
landlords and sellers, but excellent for tenants and purchasers.
SIOR commercial real estate professionals provided their views on
second quarter 2008 market conditions in their respective markets in a July
survey.
An unprecedented number of SIOR members -- 83 percent -- report that
their local markets are feeling the impact of the decline in the national
economy. This number is 59 percent higher than just one year ago. Leasing
activity is down according to 75 percent of respondents. Concessions
benefiting tenants are riding above normal and have increased 29 percent
from the same quarter one year ago. Twenty-three percent of respondents
indicated that there was virtually no new construction going on in their
marketplace and according to 67 percent of respondents construction in
general is down. Concerns about where the economy is heading are clearly
impacting commercial real estate business -- and will continue to do so as
50 percent of respondents predict a 1-15 percent decline in activity for
3rd quarter 2008.
Office Market
The Office Market has been particularly hard hit, scoring only 67.8
points -- down almost 48 points from the same period last year and 32
points below equilibrium -- the lowest Index value since SIOR began the
Index in fall 2005.
Industrial Market
The Industrial Market Index, at 68.5 points, is barely stronger than
the office market, and is more than 53 points off its 1st quarter 2006
high.
Regional Breakdown
The Northeast, with 76.4 points, comes in second best after the South.
Prices for investment property are well below replacement cost in this
region, making it unprofitable to build. In addition, sublease space in the
Northeast is a bigger issue than it is in the South or West.
Underperforming all regions, the Mid-West tallied a score of 73.1 --
the lowest Index value for 2nd quarter 2008. Respondents from the region
indicated that sublease space continues to be a negative influence in their
region, tenants are in a good bargaining position to obtain moderate to
deep concessions, and they are definitely witnessing a buyers' market.
Respondents from the region are the most pessimistic about the next three
months and most blame the overall national economy for market woes.
Respondents from the South, with an Index score of 84.6, were the most
optimistic about the next three months. The only region to escape a decline
in rental rates, the South felt that the vacancy situation, although worse,
was not significantly so; sublease space was not a big issue; and
respondents reported that investment markets were in balance.
The West, weighing in with an Index score of 68.4 points, experienced
the greatest decline in positive attitudes regarding the state of the
office and industrial markets citing the housing downturn as a factor.
Respondents from that region are reporting higher vacancy rates, deeper
concessions for tenants, meager development activity, and a high rate of
pessimism for their three month outlook.
METHODOLOGY
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
measure 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.
Headquartered in Washington, DC, the Society of Industrial and Office
Realtors (SIOR, http://www.sior.com) is a global professional organization that
certifies commercial real estate service providers with the exclusive SIOR
designation. Individuals who earn their SIOR adhere to the highest levels
of accountability and ethical standards.
Only the industry's top professionals qualify for the SIOR designation.
Today, there are more than 2,800 SIORs in 590 markets in 23 countries.
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