OFFICE MARKET TRENDS

The one word that seems to best describes the office market this past year is stabilization. We saw very little change in numbers between the end of 2009 and the wrap up of 2010. The movement we did see, however, shows us inching to­ward a slow, but much healthier recovery from the fragile economic situation we have experience during the last several years.

Vacancy rates remained almost flat, ending the year at 15.70 percent versus 15.72 at the close of '09. And while overall market rates did not change significantly, the classes of buildings did not fare equally. Market conditions fueled a flight-to-quality that lowered Class A vacancy rates, and left Class B and C properties increasing in vacancy.

Lease rates saw only minor fluctuation falling from $20.55 per square foot in 2009, to $20.47 at the end of 2010, al­though we did see some downward pressure on effective rates. Landlords ramped up efforts to win tenants, offering con­cessions such as free rent, increased tenant improvement packages, moving expenses and other creative enticements.

Absorption for 2010 increased from the previous year, ending the fourth quarter at 212,827 square feet versus 88,050 square feet in 2009. Several large deals contributed to the climb including: FLSmidth, which opened a new 100,000 square foot building in the View 72 development; Fusion-IO with 118,000 square feet at Cottonwood Corporate Cen­ter; Provo Craft with 60,000 square feet at RiverPark Corporate Center; Advanced MD with 52,000 square feet at RiverPark Corporate Center; and Goldman Sachs, which moved into 150,000 square feet of space on seven floors in the new 222 Main building downtown. The Royal Bank of Scotland Group came into the market for the first time, opening a 30,000 square foot IT office in Taylorsville.

While this is good news, and an indication of an improving economy, we are still substantially way below the 10-year absorption average of 900,000+ square feet.

In 2010, we saw a number of large lease transactions but smaller tenants continued the trend of renewing for a short period of time. These smaller tenants are awaiting signs for an improved economy before they commit to a longer term or expansion.

Source: Dana Baird, Year End 2010 Office Market Report, Commerce Real Estate Solutions.

Industrial Property Market to Strengthen

Grubb & Ellis report predicts ports, transportation hubs to see most growth.

Warehouses and distribution centers will see gradual declines in vacancies and small increases in lease rates during the next year, especially in markets near ports and transportation hubs, according to a report by the Grubb & Ellis real estate firm.

"With the weak dollar expected to boost exports and stronger consumer spending spurring imports, landlords are expected to see increased activity and demand for space," the report said.

The national industrial vacancy rate, which peaked in the first quarter of 2010 at 10.9 percent and ended the year at 10.5 percent, is expected to decline gradually to 10.1 percent by the end of 2011 and 9.3 percent by the end of 2012.

 "Net absorption of 60 million square feet in 2011 and 120 million square feet in 2012, combined with minimal new construction, will propel the expected tightening in the market," the report said.

The increases are expected to fall short of the pre-recession levels of 2005 to 2007, when annual absorption ranged from 173 million to 192 million square feet a year. "As a result, landlords will not have much pricing power over the next two years, with the notable exception of supply-constrained markets near major port and transportation facilities," the report said.

Average asking rental rates for warehouse space were $4.26 per square foot annually at the end of 2010, down 13 percent from the cyclical peak of $4.90 in the first quarter of 2010. Grubb & Ellis expects average rates to inch up to $4.30 per square foot by the end of 2011 and $4.35 by the end of 2012.

The strongest markets will continue to be locations close to ports or inland hubs. Grubb & Ellis listed the top 10 markets for industrial investment opportunity as Houston, Los Angeles, Oakland/East Bay, Calif., Dallas-Fort-Worth, Riverside/Inland Empire, Calif., Chicago, Atlanta, Portland, Ore., and Miami.

Source: Grubb & Ellis 

Global Business Confidence:

Global business sentiment ended 2010 consistent with the global economy growing at the low end of its growth potential. There has been no appreciable change in overall confidence since summer 2010. Responses regarding equipment and software investment jumped higher last week, but hiring intentions weakened. However, these moves may reflect low response rates to the survey during the holiday season. The only relatively consistent sour note is continued weak pricing trends that have prevailed throughout the Christmas buying season.

Semiconductor Billings: -0.9%
Global semiconductor sales were down 0.9% in November compared with October. The three-month moving average of sales came in at $25.97 billion for September to November, slightly higher than the June to August period. European semiconductor sales are bouncing back after the sovereign debt crisis took the momentum out of sales in the summer.

Factory Orders (M3): +0.7%
Orders for manufactured goods rose 0.7% in November, a larger than expected increase. The previously released durable goods orders figures were revised to show a drop of 0.3% (previously a 1.3% drop). Orders for nondurables rose 1.7%. Shipments of durable goods fell 0.1%-revised slightly higher from the first release. Unfilled orders and inventories rose over the month. Overall, the report was stronger than expected and is consistent with a sturdy manufacturing recovery.

Construction Spending (C30): 0.4%
Construction spending for November 2010 came in 0.4% above the revised October total, though it is still 6% below the corresponding total for November 2009. The November increase was driven by moderate gains in private residential construction and public construction spending, though private nonresidential construction spending recorded a slight decrease. However, private nonresidential construction has remained level over three months, so builder confidence seems to have bottomed out.

Jobless Claims: +18,000
Initial claims increased by 18,000 to 409,000 for the week ending January 1; the prior week's data were revised up from 388,000 to 391,000. This increase was payback for the previous week, which had overstated the improvement in the labor market. Continuing claims decreased by 47,000 to 4.103 million for the week ending December 25, though there are millions more on extended and emergency benefits not counted in this figure.

Monster Employment Index: -4

The U.S. Monster employment index shed 4 points from November to December, coming in at a level of 130. Although the drop is somewhat larger than that experienced in the previous months, it is in line with the usual seasonal decline recorded at the end of the year. Although recruitment activity weakened broadly, mining, utilities and agriculture registered increases in demand from November. The index is still up 13% from its December 2009 level

Challenger Report: -60%
Year-end job cuts fell to only 32,004, the lowest total for the year and well below the levels that prevailed prior to the recession. This suggests that employers cut their staffing to the bone during the recession and the expected growth in the economy in 2011 will be accompanied by hiring. About 530,000 job cuts were announced during 2010, nearly 60% below the 2009 total.

Case-Shiller® Home Price Indexes: -1.6
The Case-Shiller home price indices dropped sharply in the third quarter of 2010 as a result of the end of the homebuyer tax credit. The national index declined quarter over quarter by an annualized 13.1%, a decline that is evident in all census divisions, with the South Atlantic and Mountain states faring the worst. Foreclosure moratoriums due to the "robo-signing" problems have buoyed fourth quarter prices, but prices will fall again this year as servicers work through the loan processing issues.

MBA Mortgage Applications: +2.3%
In the week ending December 31, the market index advanced 2.3% from one week ago. The index now stands at 472.1. These gains were driven by a 3.9% increase in refinancing over the same period, pushing the index to 2,115.4. Meanwhile, purchase applications receded to 199.8, a drop of just 0.8%.

Chain Store Sales: +3.1%
The holiday shopping season ended with a bit of a whimper, in part because of winter weather, but it was still good compared with recent years. Chain store sales grew 3.1% in December and 3.8% over the November and December period, according to the ICSC. The latter was the best growth since 2006 and in line with expectations as the season started.

Vehicle Sales - AutoData: 12.5 mil
The auto industry ended the year on a relatively strong note, with seasonally adjusted annualized sales of 12.55 million units. Discounting the cash for clunkers boost in August 2009, the December pace was the strongest since September 2008. Sales are being driven by discounts and new models as well as the release of pent-up demand. Steady gains should continue in 2011.

Weekly Natural Gas Storage Report: -135.00 bcf
Working gas in underground storage fell by 135 billion cubic feet during the week ending December 31, more than the consensus estimate of a 131 bcf decline. This report will push natural gas prices higher.

Oil and Gas Inventories: Crude -4.2 & Gasoline +3.3 mil barrels
Crude oil inventories fell by 4.2 million barrels during the week ending December 31. Gasoline inventories rose by 3.3 million barrels, while distillate inventories rose by 1.1 million barrels. Refinery capacity utilization ticked up to 88.0% from 87.8%, in line with expectations. Petroleum demand fell sharply. This mixed report is on net a negative one for oil prices.

Source: Economy.com