SIOR COMMERCIAL REAL ESTATE INDEX FOURTH QUARTER 2009 RESULTS

January 2010 – More than 700 SIOR market experts across the country weighed in on local Industrial and Office market conditions for the Fourth Quarter 2009 SIOR Commercial Real Estate Index, compiled by the Society of Industrial and Office Realtors (SIOR) in association with the National Association of Realtors (NAR). SIOR members again report that the national economic recession continues to have a significant negative affect on local industrial and office markets. However, 55% of SIOR members expect the market to improve next quarter. Although only an 8% positive increase over the 3rd quarter sentiment, optimism, none the less, continues to increase.

Investment activity continues to be down across the board as 86% of SIOR experts report prices are below replacement cost—only 12% of respondents report prices in line with replacement costs.
Development activity continues to evaporate across the country as 98% of SIORs reported that development was down, with 87% saying that development is virtually nonexistent in their markets. SIORs overall report a buyer’s market for development sites—48% indicated a strong buyer’s market while 49% indicated they were experiencing a buyer’s market, but prices were stable.

Tenants continue to reap a benefit of today’s economy as 97% of SIOR respondents report either deep discounts to asking rents or moderate levels of tenant concessions. Only 3% of SIORs feel they are experiencing a normal negotiating balance. Leasing activity continues to be below historic levels, vacancy rates remain high, and asking rents are low.

The SIOR Index, which measures 10 variables pertinent to the performance of U.S. industrial and office markets (see Methodology), rose slightly following 11 quarters of straight decline. It gained a miniscule .2% finishing at 35.5 points—100 points signifies a balanced market. We have not experienced equilibrium (100 points) since third quarter 2007.

Office Market
The national economy clearly is taking its toll on both the Industrial and Office markets. Leasing activity and rental rates for the Office market are slightly stronger than the Industrial market. However the Office market has more sublease space available and their prospects for improvement in the next three months are lower than the industrial market.

Industrial Market
Overall, the third quarter Industrial market points remained the same as 3rd quarter. However, it experienced a slightly higher increase in vacancy rates, higher levels of tenant concessions, and falling prices.

Regional Breakdown
The West (27.1 points) continues to be in the doldrums. Its overall market is suffering from the lowest level of leasing activity of all regions, the largest decline in asking rents, and the deepest level of concessions. Consequently, the short term outlook for the West is the lowest of all regions.

The South (37.8 points) has the highest performing submarket—the West South Central—which scored 44.7 points. The region posted the best vacancy rates of the four regions. While it is a buyer market in all regions, the South is experiencing prices that are slightly more stable.

The Northeast (43.7 points) Although declining 2.4 points from 3rd quarter 2009, the Northeast continues to led all regions scoring the highest total points this quarter. The region is finding prices that are slightly more stable, the amount of sublease space subsiding, and a slightly better level of development and leasing activity than other regions.

The Mid-West (36.3 points) did not change from 3rd quarter. Although the national economy is still having a negative affect in all markets, it is hitting the Mid-West more than other regions.

METHODOLOGY
The SIOR Commercial Real Estate Index is constructed as a “diffusion index,” a very common and familiar indexing technique for economic measures. Other examples of diffusion indexes include the Index of Leading Economic Indicators, the Consumer Confidence Index, and the Institute of Supply Management’s Purchasing Managers’ Index. In the SIOR Commercial Real Estate Index, a value of 100 represents a well-balanced market for industrial and office property. Values significantly lower than 100 indicate weak market conditions; values significantly higher than 100 indicate strong market conditions. The theoretical limits of this Index are a low of zero, and a high of 200, though it is unlikely that such limits would be approached as long as the property markets are operating efficiently.

The Index is based on a survey questionnaire with ten topics. The topics covered are (1) recent leasing activity; (2) trends in asking rents; (3) trends in vacancy rates; (4) subleasing conditions; (5) levels of concession packages in leases; (6) development activity; (7) site acquisition activity; (8) investment pricing levels; (9) the impact of the local economy on the property market; and, (10) the effect of the national economy on the property market. Survey respondents are given five choices. For each topic, five choices are provided, corresponding to conditions that are very weak, moderately weak, well-balanced, moderately strong, or very strong.

For each question, answers are tallied and the percentage of responses for each of the five choices is calculated. If survey panelists indicate “very weak” conditions (the “a” choices in the questionnaire), the answer is assigned 0 (zero) points; “moderately weak” (“b” answers) earn 5 points; an indication of “market balance” (“c”) receives 10 points; “moderately strong” indications (“d”) score 15 points; and “very strong” (“e”) responses receive a maximum 20 points. Thus a score of 10 for a given question can be earned if responses are evenly distributed across all five choices, if all responses were “c”, or if the answers form a “bell-shaped curve” centered around the “c” choice. The total index value is derived by summing the scores for all ten questions. Index values for each of the two property types are similarly calculated.

The survey was developed by Hugh F. Kelly, CRE, clinical professor at New York University, who worked with SIOR on research projects since 1989.

Headquartered in Washington, DC, SIOR (the Society of Industrial and Office Realtors, www.sior.com) is a global professional organization that certifies the expertise of commercial real estate service providers with the exclusive SIOR designation. Individuals who earn their SIOR adhere to the highest levels of accountability and ethical standards. Only the industry’s top professionals qualify for the SIOR designation. Today, there are more than 3,000 SIOR members in 580 markets in 26 countries—2,800 of whom hold the SIOR designation.

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