May 11,2011
Most commercial real estate market commentators focus on vacancy and availability rates while neglecting what may provide better insight into market dynamics – the spread between them. Instinct suggests that the market’s availability should always exceed its vacancy. After all, landlords start to market space at least six months in advance of vacancy, and this lead-time doubles in a weak market. The accompanying graph illustrates the change in the spread over time, which ranged from 100 to 150 million square feet before the recession to as high as 400 million square feet at the market’s trough. During the recession, some tenants went out of business, some consolidated their operations and some were reluctant to renew their leases until they had expired, or even later, as landlords were willing to sign month-to-month leases to keep their buildings occupied. In each of these scenarios, landlords started to market the space for lease, impacting the availability rate while vacancy remained unchanged until the tenant moved out. During the recovery, the process should reverse as new leasing activity increases and existing tenants renew earlier. In fact, in an overheated market, such as San Francisco in 2000, it is possible for a market to have fewer available square feet than vacant as tenants lease space before it becomes vacant and the landlord is able to complete improvement work required by the new tenant. Over the last year, the national industrial market has experienced nearly 80 million square feet of positive absorption and an 80-basis-point decline in the vacancy rate. The available/vacant spread has remained unchanged, however, making it an important metric to watch for the remainder of 2011 – a stubbornly high level could signal that the market’s recovery is stalling. Source: Grubb & Ellis
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