Scotsman Guide > Commercial > May 2015 > Department

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Commercial Department: Q&A: Alan L. Pontius, Marcus & Millichap: May 2015

 

Q&A: Alan L. Pontius, Marcus & Millichap

Alan L. Pontius, national director, Commercial Property Groups, Marcus & Millichap

The office market continues to rebound in 2015

In the lead-up to the recession, new office buildings rose in a building boom. When the recession hit, companies had to use space-saving initiatives to shrink their square footage, which created a glut of vacancies that many markets are still struggling to absorb. Although estimates vary, the national vacancy rate remains in double digits, and new office buildings have been slow to come online. Unlike the relatively quick recovery in the multifamily and hotel sectors, the office recovery has been slow and steady. This past year, the market showed more signs of picking up, however. To better understand the trends in the office market, we spoke with Marcus & Millichap’s Alan L. Pontius.

How would you assess the health of the office market now?

Certainly rebounding. We have seen vacancy [rates] dropping in the majority of the markets across the U.S.

It is a byproduct of an improving employment picture pitted against extremely low introductions of new supply and, in some markets, you even have supply shrinking. Some older stock that would not perform anytime soon [has been] repurposed [into] multifamily. Office development has really been nothing to speak of for a number of years. Overbuilding has been stripped out of the market and has been out of it for years.

Doesn’t the vacancy rate remain stubbornly high?

In some markets, but in other markets, [it is] below 10 percent. In a number of markets, you have specific submarkets that are under a 10 percent vacancy. The national vacancy today is a little over 13 percent. That number has been dropping for the past five consecutive years.

What industries are driving the recovery?

High-tech is the lead industry now, especially since energy is cooling off. You are talking about high-tech [and] growing businesses in the service sector.

Are new buildings slow to come online because credit is tight?

Not really. Office demand and office utilization has changed significantly over the past three or four years as technology has influenced how space is utilized. Technology influences what kind of utilization ratios are applied to office. Really, the reason that new supply isn’t coming out is that it is a volatile product type. The lead time to develop is two-plus years from conception to the introduction of a new property. With the long lead time and the more challenging environment to forecast ongoing demand, speculative office development has been virtually nonexistent now for the past five years.

The only type of development taking place is of a build-to-suit nature and, in particular, markets where you have exceptional strength, like a San Francisco. You have large built-to-suit projects because they have an anchor tenant but the rest of the development is speculative. For the most part, the cost of construction and the risk of trying to forecast demand have basically caused office development to fall off the table, and therefore the supply side of the equation has been kept relatively constant for an extended period of time. It is a riskier proposition from a development standpoint, and only now we are starting to see consideration for speculative development in some of the urban-core areas.

How does building activity compare to prerecession times?

There was a bigger development pipeline, and more going on in ’04, ’05 [or] ’06, by a long shot. Office development may have been introduced at a rate of 3 [percent] to 4 percent of existing stock. Today that figure hovers around 1 percent, so statistically there is very little being constructed.

What is your outlook for the remainder of 2015?

Vacancy rates will absolutely continue to go down. In terms of escalation of supply, you might see some modest escalation of supply in 2015, but it will not be substantial. When you have a continually improving jobs picture, that works nicely on the demand side. I would say the office market is showing continuous rebound.

Alan L. Pontius is responsible for all of the leased investment divisions within Marcus & Millichap. This includes oversight of the company’s National Office and Industrial Properties Group (NOIPG), Net Leased Properties Group (NLPG) and its Healthcare Real Estate Group (HREG). Pontius is also the national director of the Special Assets Services (SAS) division. He began his career with Marcus & Millichap as a sales associate in 1985.


 

Victor Whitman is editor of Scotsman Guide Commercial Edition. Reach him at (800) 297-6061 or victorw@scotsmanguide.com.

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