Real Estate Market Reports & Enterprise Lease Portfolio Management

In my last couple of blog posts, I covered the basic elements of real estate market analysis and the real estate market cycle.

In case you missed them:
Real Estate Market Analysis: A Primer for CRE Executives
Understanding Real Estate Market Cycle for CRE Market Analysis

In this post, I’ll reveal how you can use office real estate market reports to gain insight into specific market trends. Office real estate market reports are an essential tool in the effective management of the enterprise leasing portfolio.

To illustrate the use of commercial real estate market reports, let’s consider a major market in the Bay Area, California, Silicon Valley. This market is the center for technology innovation, and is the home of some of the major technology firms like Google, Apple, HP, and Facebook. Silicon Valley has experienced significant growth in space and many large tenants are reaching their ten-year renewal point from market lows in 2008.

Here are the key questions you need to address in assessing the market:

• What has been the growth in employment and how will this drive demand?
• What is the trend in vacancy and how will this affect net absorption?
• What’s been the trend in net rental rates?
• What is the over-all market outlook.

Let’s take a look at the answers you can find in the real estate market reports from Cushman & Wakefield, Jones Lang LaSalle, and Savills Studley.

Real estate market analysis report examples

Below are excerpts from three real estate market reports for the 4th quarter of 2017. Notice how the reports vary in emphasis but still give a composite picture of the Silicon Valley market.

Cushman and Wakefield:

• The current average asking rent of $4.57* psf (full service) is up from $4.51 psf one year ago. They expect average rents to flatten across the Valley as the concentration of deals will be in lower rent markets.
• Net absorption in Q4 was 222,000 sf, an increase from the negative -78,000 sf recorded in Q3.
• They anticipate that activity will improve in 2018. Tenant demand remains strong at 9.9msf of active market/ R&D requirements.

Jones Lang LaSalle:

• 2017 marked the 7th consecutive year of positive occupancy gains for Silicon Valley.
• With the Valley entering its 8th consecutive year in the current cycle, tenants that signed 10- year deals between 2009 and 2010 are nearing their renewal exercise date.
• Those that signed leases when rents were at cyclical lows may consider less expensive submarkets in an effort to keep their occupancy cost contained.

Savills Studley:

• Deal volume spiked to 1.5 msf, the strongest total since the fourth quarter of 2016. A flurry of leases over 100,000 sf fueled the quarterly spike.
• The regions’ overall availability rate decreased by 110 basis points to 14.9%, dropping 40 basis points from year end 2016.
• The class A rate fell by 240 basis points to 18.6%, its lowest mark since sub-leasing late 2016, and has dropped 10 basis points from year end 2016.
• Regional overall asking rent ($3.99 dipped by 3.5% during the fourth quarter, but has increased by 7% year-on-year.
• Class A rent has spiked by 6.3% from year-end 2016 to $4.20.

(*Note: rental rates are quoted on rate per SF on a monthly basis in West Coast markets, not on annual basis which is typical in other US markets.)

Major deal activity in real estate market reports

• Savills Studley focused on the impact of co-working. WeWork made a big move in the Valley during the 4th quarter subleasing 450,000 sf at 301 and 401 San Antonio Avenue in Mountain View. The facility will house WeWork’s Enterprise division which is targeting leases with major corporations. Amazon for example, leases nearly 15,000 sf at WeWork’s Valley Tower center in Downtown San Jose.
• Cushman & Wakefield also focused on WeWork. The largest deal of the quarter was a sublease by WeWork from Linkedin (456,000 sf) in Mountain View.
• WeWork is rumored to have a tenant in tow for approximately 228,000 sf of that space.

Tips for using office real estate market reports

• Work with your broker or tenant representative in analyzing and interpreting market reports in advance of leasing projects.
• Update market outlooks for major leasing locations on a semi-annual basis.
• Use the real estate market reports to identify risks such as limited availability, abnormal rental rate increases, or changes in local codes that would impact long term occupancy.

CRE Managers: Stay on top of market trends

CRE managers should remain cognizant of market trends in locations where leasing actions are anticipated over the next two years. Real estate market reports are an essential tool in keeping the CRE team up to date on market trends. Focus on net absorption, employment trends, changes in occupancy, and rental rate trends. Be aware of changes in your key market cities; and be prepared to respond with actions that limit leasing risk and exploit market opportunities.

To learn more about lease portfolio management, read these related articles:

Lease Portfolio Management: Policies & Procedures to Reduce Risk
Corporate Real Estate Strategies and the New Lease Accounting Standards