Saturday, October 25, 2008

Downtown Vacancy: Is it That Bad?

The revived concern about downtown leads one to speculate on how downtow, AKA the Central Business District, or CBD, compares with suburban office markets.

The real estate company Colliers has a very useful set of reports in .pdf format available from their site that provides vacancy percentages for various markets (as well as one that's not on their site but available via google). Unfortunatly the more recent reports don't break out the rates by Class A, B, or C space (Class A being the most desirable) for recent years.

But what is available permits a quick plotting of trends for the CBD and the three suburban market on a bi-annual basis (with two points of Class B/C data for the CBD)

One can see CBD Class B/C pushing 30% for midyear 2007. One should also note this doesn't included buildings that are off the market, like 25 South Main and the Arcade offices, or government buildings. Yet the CBD doesn't seem so bad compared to whats happening with the north suburban market, which has comparable vacancies.

A good question is if the 20%-30% range is high. Or is there a certain natural vacancy rate for office markets?

The theory is that a natural rate is at which vacancy rates settle after working through an economic shock, such as a recession or difficulties in an economic sector or loss of a major employer.

There has been some research on this, and a good introduction is a paper from the Federal Reserve Bank of San Francisco: Natural Vacancy Rates in Commercial Real Estate Markets.

This paper looks at vacancy rates for the metro areas in that district, noting that rates vary by city. One might also say a natural rate might vary by submarket within a metropolitan area, as may be the case in Dayton.

For Dayton there are only about four data points here, so not enough of a time series to really say what a natural rate would be. The theory would say that for Dayton the loss of the Mead Corporation would be an economic shock affecting CBD rates due to the second tallest skysrcaper in the city coming onto the market.

When one or two properties as large as the Mead Tower come on the market would this mean the natural rate would undergo a phase shift, to a consistently higher percentage? And how would that effect properties at the lower end of the scale?

For Dayton there is some history to work with. When newer buildings came on the downtown market in the 1970s the older high and mid rises ended up going vacant. Of the 28 multiple tenant office buildings listed in a 1968 study, 2 were torn down, 2 went vacant and were closed, and 3 were converted into government offices. So the market corrected by taking space out of play in various ways.

In any case, the vacancy rate, at least what's shown in the Collier studies, are not as high as one would expect, with at least two thirds of the space in the CBD being occupied.

So maybe the situation isn't that dire.

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