East Overview
 
The Economy
Regional  Economic Indicators        Northeast Current Year Projection 2008           Projection
Non-Farm Employment  0.3%  0.7%
Gross Domestic Product  1.9%  2.2%
Retail Sales  1.8%  2.6%
     
Source: Moody's Economy.com    

NORTHEAST REGION OVERVIEW

• With the regional e conomy adversely affected by the turmoil in housing, construction and finance, Florida, with its recent condominium boom, is feeling the most pain.

•  Completion volumes in excess of same-term absorption have not yet produced an increase in the South’s office vacancy rate.  That may arrive soon as construction continues to escalate.  Rent growth, meanwhile, has slowed.

•  New retail supply continues to exceed demand.  Vacancy held steady during the quarter but is up year over year.  Construction activity grows.

• While industrial demand increased during the quarter, it failed again to match the levels of new supply.  As in other sectors, construction activity continues to increase.


 
 
 
 
 
OFFICE

·         Net absorption runs comfortably ahead of same-term new supply.  Current construction is dominated by the New York area, Boston and Philadelphia. 

·         Heavily influenced by New York, regional occupancy and rent growth rates show substantial recent increases. 

·         New York dominates investment sales activity but significant volumes are indicated for some New England markets as well

Supply and Demand

Slow economic growth coupled with land and cost issues makes for a perennially low profile for office development in the markets of the Northeast, with the occasional exception—New York’s replacement of World Trade Center office space, for example.   Indeed, the New York market, which comprises more than a quarter of the region’s stock of existing inventory and accounts for nearly 40% of current construction, bears a dominant influence on the region’s statistical portrait.  Region-wide, meanwhile, 24.1 million square feet were under construction at the close of third quarter according to CoStar Group, down 5.6% from a quarter earlier and also 5.1% lower year over year. Net absorption, moreover, is running comfortably ahead of same-term new supply.  The 5.8 million square feet delivered over the last six months coincided favorably with the 9.6 million square feet absorbed net.  In this respect, New York, Philadelphia and, to a lesser extent Boston, were the star performers.  

 

·         The 9.0 million square feet under construction in New York, down from 10.5 million a quarter earlier, remain unparalleled in the region.  Delivery of 1.6 million square feet during six months, including third quarter’s 1.5 million, were easily offset by occupancy gains of 2.6 million.

·         Boston and Philadelphia follow with respective under-construction volume of 4.4 million and 4.2 million square feet, the former up 16.9% from a year earlier, the latter down 12.6%.  Philly’s 3.0 million square foot six-month net absorption total was the region’s best.  Boston was solid with 1.1 million. 

·         New York’s peripheral markets—Long Island, Westchester County and Northern New Jersey—claim a combined under-construction total of 5.8 million square feet.  

 

Vacancy

 

Including a 10-point decrease in the vacancy during the latest quarter, the 40-basis-point decline achieved year-over-year in the Northeast is the nation’s best performance.  The current 9.9% vacancy stands as the nation’s lowest.  Again, New York’s exceedingly low rate skews the regional number to some extent: six of the nine Northeastern markets see rates above the regional average.   Five, meanwhile, enjoyed year-over-year declines.  With the exception of a 160-basis point increase in Providence, the gains were small.  

 

·         Vacancy in New York City, lowest in the U.S., is 5.3%, down 10 bps from a quarter earlier, down 120 year over year and down 200 since third quarter 2005.    

·         Philadelphia, the leader in six-month absorption as noted, claims a third-quarter rate of 12.6%, down 30 bps for the quarter. Only Pittsburgh’s 14.2% stands higher.  

·         Vacancy at 10.9% is indicated for Boston as the recovery there continues.  Rates of 11.1% and 11.2% are indicated for the previous quarter and third quarter 2006 amid modest volumes of new supply. 

Rents

 

High average occupancy and the favorable excesses of demand over same-term new supply serve to fortify rent growth.  The regional rent increases of 2.0% and 10.7% recorded during the latest quarter and year over year were overshadowed only by the performance of the Western markets.  The $32.74 psf regional asking rent, meanwhile, had no match nationwide.  Like others, though, these numbers are skewed upward significantly by New York’s growth rates and rent levels (see below).  If New York is excluded, rent growth for the Northeast as a whole falls dramatically.  New York aside, only two of the eight remaining markets enjoyed third quarter growth rates above 1.0%. 

 

·         At $57.91 psf, New York City’s overall average lease rate was up 3.6% and 22.0% from a quarter and year earlier.  

·         Next-best year-on-year growth rates, 4.6% and 4.3%, are indicated for Philadelphia and Long Island.  Gains for the latest quarter were 0.9% and 0.1%.    Respective rents are $22.02 and $26.71 psf. 

·         While Providence enjoyed the region’s best third quarter increase at 5.3%, its $18.49 psf average remained 2.5% below the rate achieved a year earlier. 

 

Investment Sales

 

Led by Manhattan, investment sales volume in the Northeast proper (excluding Pittsburgh and Philadelphia) is reported by Real Capital Analytics (RCA) at $45.69 billion so far this year, a whopping 207% increase over the last 12 months.   At 6.1%, the average cap rate, driven downward by low rates in Manhattan, was lowest among all U.S. regions.  Under the same influence, the Northeast’s $448 psf average selling price was the national high.  Philly and Pittsburgh, with a combined total of $880 million in sales year-to-date, represent a year-on-year decline in volume for each city. Cap rates in these markets are considerably higher. 

 

·         With $32.63 billion changing hands across 155 transactions, Manhattan accounted for 70.1% of regional dollar sales volume (including sales in the two Pennsylvania markets).   Its 5.0% average cap rate was the regional low (and second in the U.S. after Austin’s 4.8%). The Big Apple’s average sales price of $691 psf was easily the national high.

·         Boston and Stamford followed with $4.67 billion and $3.06 billion in sales.  Respective average deal prices were $213 and $262 psf.  Cap rates were 6.2% in both markets.   

·         Major recent deals include Somerset Partners $510.0 million ($1,527 psf) acquisition of the 334,000 square foot 450 Park Avenue building in Midtown Manhattan.  The New York State Teachers Common Retirement Fund-Taconic Investment Partners joint venture was the seller. 

 

RETAIL

·         Strong net absorption during third quarter more than erased the imbalance of the previous quarter. 

·         The recent upward movement in the vacancy rates was reversed with a 20-basis point decline.  Rent growth showed commensurate improvement. 

·         Investment sales growth year over year in the Northeast was the slowest nationwide.  

 

Supply and Demand

 

After lagging during second quarter, net absorption of retail space leapt ahead of same-term new supply 4.5 million feet versus 2.5 million square feet.  This favorable excess more than redresses the imbalance of the preceding period.  Accordingly, respective construction completions and net absorption for the last six months calculate at 4.9 million and 6.4 million square feet, enough to take a chunk out of the regional vacancy rate (see below).  While the 26.6 million square feet under construction at quarter’s end represent a 2.2% decrease in activity from a quarter earlier, activity was up fully 65.0% from 12 months prior.     

                                                  

 

·         After recording second quarter’s weakest performance, Philadelphia responded with third quarter’s best, absorbing net 2.75 million square feet, far in excess of the 962,200 square feet delivered during the period. 

·         Philly also leads in current construction with 6.0 million square feet underway.  Boston and Northern New Jersey follow with current construction sums of 4.5 millionand 4.3 million square feet.  

·         Net absorption also was strong in the Long Island and Northern New Jersey markets at 880,600 and 566,200 square feet.  Same-quarter completions for the quarter ran well below demand here.  

 

Vacancy

 

The upward movement in vacancy of recent quarters was arrested during third period.  A 20-basis point drop, the nation’s best performance for the quarter, lowered the rate to 7.0%.  Four of the region’s markets saw their rates decline during the quarter, two showed no change and three recorded increases.  

 

·         Philadelphia’s strong absorption contributed to a 60-bps drop in vacancy, the region’s best for the quarter.  At 9.0%, however, vacancy here still stands as the highest in the Northeast. 

·         New York’s 5.2% marks the regional low.  Hartford, Providence, Northern New Jersey and Long Island all enjoy rates below 6.0%.   The latter’s 60-bps decline to 5.8% was the best over 12 months. 

·         Vacancy in Pittsburgh, up 140 bps since third quarter 2006, remains elevated at 8.3%.  

               

Rents

 

Rent growth, reflecting favorable supply and demand and occupancy trends, has improved.  The 2.0% increase recorded for third quarter tied the region with the South for the nation’s top performance.  Year-over-year growth was 6.4%.   The third quarter average is $20.03 psf.  While gains vary considerably from place to place, all markets save Providence saw their average retail leasing rates increase during the latest quarter and year over year.  

 

·         New York is the rental star.   Its rents of $71.29 psf, up 4.4% since mid-year, is the highest in the U.S. Its 24.3% year-over-year increase is the best in the Northeast. 

·         Pittsburgh, its recent negative absorption and rising vacancy aside, recorded the quarter’s largest gain with a 9.4% increase to $14.46 psf.  This contributed to a similarly noteworthy 14.0% increase over 12 months.

·         Long Island and Boston recorded third quarter increases of 3.0% and 1.8%.  Respective average lease rates are reported at $30.84 and $16.74 psf. 

 

Investment Sales

 

Stronger activity in other regions deprives the Northeast of the leadership in retail investment enjoyed by its office markets.  According to RCA, sales volume in the Northeast proper year-to-date through third quarter was $6.00 billion.  This 12% year-over-year increase – smallest nationwide – included declining volumes in Manhattan, Stamford and Hartford.  Average cap rates and sales prices in the Northeast were 6.5% and $172 psf.   Small year-over-year increases in sales are indicated for the two Pennsylvania markets. 

 

·         Boston leads the region in year-to-date sales volume at $1.33 billion, up 73% from the comparable span of 2006.  Philadelphia follows at $928 million, up 147%. 

·         Manhattan’s cap rate of 4.8% is the nation’s lowest.   The city led in average sales price at $1,022 psf.  Its $838 million in sales year-to-date is down 43% year over year. 

·         Recent notable sales include Vornado Realty Trust’s purchase for $48.8 million ($400 psf) of a 122,000 square foot freestanding single-tenant Home Depot facility in Vauxhall, NJ.  Home Depot was the seller. 


INDUSTRIAL

·         A sharp reversal placed a comfortable distance between demand and new supply during the quarter.  Construction remains active.   

·         The vacancy rate shed 20 basis points; positive growth returned to rents. 

·         Despite substantial increases in some areas, investment sales volume slipped 5% in the Northeast year over year. 

 

Supply and Demand

 

A fortuitous combination of declining sums of construction deliveries and rising demand graced the Northeastern industrial market during third quarter.  The end result, reversing the previous quarter’s imbalance, placed net absorption above new supply at 7.5 million to 2.6 million square feet.  Led by Philadelphia, all but two of the region’s eight markets had positive third quarter absorption totals and all save Long Island and Westchester achieved overall gains over six months.  Construction underway region-wide declined 4.3% during the quarter to 22.9 million square feet.  That said, year-over-year volume has risen by 41.3%.  

 

·         Philadelphia’s 5.5 million square feet dominated regional third quarter net absorption by wide margins.  Its 2.0 million square feet also claimed the lead in deliveries.  Respective six-month absorption and completion sums are counted at 6.8 million and 5.4 million square feet.

·         Pittsburgh, Boston and Westchester County followed with latest quarter net absorptions sums ranging from 835,000 to 870,000 square feet, roundly speaking.  New supply volumes trailed substantially in all three. 

·         With 9.8 million and 8.8 million square feet underway, Northern New Jersey and Philadelphia together account for 81.5% of regional space under construction. 

                 

Vacancy

 

The ascendancy of demand over same-term new supply achieved during the latest quarter produced a 20-basis point drop in regional vacancy, to 9.6%.  The rate was 10.1% four quarters earlier.  Improvement aside, industrial vacancy in the Northeast remains the highest on average nationwide.  Five of eight markets claim rates in the double digits; only Long Island runs under 8.0%.  Four markets saw their rates decline during the quarter, two held steady and two showed increases.   

 

·         Best improvement for the quarter and year over year belongs to Pittsburgh,  where respective decreases of 120 and 140 bps produced a quarter-end rate of 13.3%.   With these declines, Boston assumed the dubious rank of highest vacancy at 13.5%.  

·         Vacancy in the boisterous Philadelphia market shed 50 bps during the quarter to close the period at 10.1%. 

·         Long Island’s 4.8% vacancy rate, up 30 bps since mid-year, remains the lowest in the region.  Northern New Jersey and Providence were next at 8.0% and 8.1%.

 

Rents

 

Moderate rent growth for the latest quarter was a marked improvement from the loss reported by CoStar for the preceding quarter.  The $6.38 psf regional average represented a 1.2% gain for the period; the gain year over year was 2.4%, well below growth rates recorded for the West and South yet still ahead of the minimal increase recorded for the Midwest.  Performances by individual market were mixed with respect to growth.   Losses in two markets during the quarter were accompanied by gains in all others.  Average lease rates ranged from Pittsburgh’s $4.39 psf to Long Island’s $10.43 psf. 

 

·         Providence’s growth numbers are the region’s best: gains of 3.7% for the quarter and 10.4% over 12 months produced a third quarter average of $5.32 psf.  Long Island recorded respective gains of 3.1% and 6.1%.

·         Second-best growth year- over-year was achieved by Hartford’s 8.5% increase to $5.12 psf.  That gain, however, included a 1.2% decline during third quarter.

·         Boston continues to struggle.  Latest-quarter and year-over-year growth rates of 0.4% and negative 1.6% are cited.  The third quarter average rent is pegged at $6.74 psf. 

 

 

Investment Sales

 

Excluding the Pennsylvania markets, RCA reports total investment in Northeast industrial properties at $3.23 billion since the year began, down 5% from the comparable period of 2006.  Average cap rate and selling price, while varying considerably from place to place, register at 6.8% and $88 psf, each down slightly from the averages recorded for the first half of the year.  Year-to-date sales in Philadelphia totaled $214 million, up 405% year on year. 

 

·         Boston led the region in sales volume through the first three quarters of the year at $1.17 billion.  Average selling price and cap rate were $80 psf and 7.2%.   Lowest cap rates were 5.7% and 6.0% in Manhattan and the New York City Boroughs. 

·         Northern New Jersey was one of the nation’s major distribution hubs to demonstrate “strong pricing growth” year-to-date, according to RCA.  AT quarter’s end,  sales prices and cap rates are pegged at $72 psf and 7.0%. 

·         Recent sales include Lincoln Property Company’s acquisition for approximately $18.4 million (about $56 psf) of the 329,000 square foot Reebok Distribution Center in Stoughton in suburban Boston.  Reebok Inc. was the seller. 

 
 
Coldwell Banker Commercial
1 Campus Dr
Parsippany, NJ 07054
www.coldwellbankercommercial.com
 
  
 
This newsletter is provided for informational purposes only and is not intended nor should it be deemed to provide legal, tax, financial or investmentadvice or guidance. You are urged to contact your own professional for specific guidance. Analysis and forecasts provided exclusively for Coldwell Banker Commercial by Boxwood Means, Inc. based on data provided by Reis, Inc. The views, opinions and statements set forth in this newsletter do not necessarily reflect those of Coldwell Banker Real Estate Corporation.
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