The SIOR Commercial Real Estate Index

The SIOR Commercial Real Estate Index showed modest improvement with an increase of 0.30 points over February's index as reported in the May 2006 release from the Society of Industrial and Office Realtors.
from SIOR.com
"The national industrial and office property market index advanced to 119.70, compared with 119.40 in February 2006 and 115.75 in November 2005. This is good news for owners of industrial and office property. An Index Value of 100 reflects well-balanced commercial real estate conditions. Values greater than 100 represent strong market conditions favoring existing owners, as landlords and as sellers of properties. Values below 100 indicate favorable negotiating conditions for tenants and for those looking to acquire real estate.
The SIOR index, compiled from survey responses from more than 300 SIOR Industrial and Office Real Estate Brokers in late April/early May, is a diffusion index, calculated by methods similar to the Index of Leading Indicators, the Consumer Confidence Index, and the Purchasing Managers Index.
Industrial properties such as warehouses and distribution centers are further along than office in their cyclical recovery. The industrial subindex registered 122.24 in the Second Quarter, up modestly from its 121.69 score in the First Quarter. Industrials achieved very strong scores in improving occupancy and in the virtual disappearance of subleasing activity as a drag on market performance. In addition, rental rates have risen materially in two-thirds of the nation's industrial markets, compared to one year ago. Tenants find sufficient bargaining strength to extract leasing concessions in just 30% of the markets responding. Development is reaching nearly normal levels, and owners of prime land see strong acquisition demand.
Economic trends, however, are the subject of some concern as questions about the effect of both local and national economic conditions on industrial market trends returned lower scores than in the previous quarter.
The Office subindex rose 1.96 points since February, and now stands at 117.41. The Office Market is experiencing broad-based rental rate increases, driven by occupancy gains reported by just over 70% of the survey panel. Investment pricing is strong – at or above replacement cost as indicated by 79% of the respondents. Development is still lagging, however, and this presages further improvement in vacancy rates for the year ahead. Subleasing has minimal impact on offices right now, but tenants still have some bargaining power to negotiate lease concessions in about half the markets covered. In trying to capture this opportunity while it lasts, tenants have brought leasing activity to normal or higher-than-normal levels reported by the survey panelists.
Regionally, the West remains at the top of the list of market areas, with a subindex score of 136.07. Respondents from this region cite the pressure of their thriving economy on commercial real estate markets. Rental rates are rising rapidly, as demand for space is outstripping new supply. Development has not yet returned to its normal level, though builders are avidly searching for new commercially zoned land. The super-heated housing market of recent years has diverted many potential commercial locations into residential use. With the exception of development, the West scores the highest of all regions on the full range of variables covered in the SIOR survey.
The South scored 123.35, evincing considerable strength. Parts of the region are still adapting to the changes wrought by the hurricanes of 2005. Louisiana and Mississippi are dealing with population dislocations and the rebuilding of businesses. But markets with close ties to the energy industry are seeing tremendous commercial space demand. While the South does not match the West's extreme high scores for many of the index components, it does well throughout the entire list of variables. It is the region that is getting closest to its historical average in commercial development, and is virtually at the normal score in terms of the balance of negotiating power between landlords and tenants. However, the sprawling markets typical of this region have received less benefit in investment price than the other three geographic divisions.
Scarcity is beginning to drive market behaviors in the Northeast, which registered a regional score of 114.78 in the May survey. It is a sellers' market for commercial development land, even though builders are not yet rushing to market with speculative projects. As in the South, landlord/tenant bargaining power is showing good balance. Rental and vacancy trends, and subleasing conditions, all post positive responses in the Northeast tallies. Financial industry and government growth, as well as globalization in all its manifestations, have been the demand catalysts in this region.
However, respondents do note that investment pricing is still out ahead of rent and occupancy improvements, as capitalization rates remain very low. The relatively high costs here may account for a comparatively low pace of overall leasing activity, as several respondents see more lookers than takers of commercial space.
The troubled automobile industry and its network of supplier and services firms have been the long-time economic engine of the Midwest. This economic base cannot support much new commercial real estate demand at present, and this is at the root of the region's sub- par score of 97.11 in the May survey. While some improvement in conventional measures such as asking rents and overall occupancy can be seen in the numbers, leasing activity here is by far the weakest of any region, and 77% of the respondents identify the tenants as holding the dominant position at the bargaining table. Tellingly, the Midwest is the only region where the impact of the local economy is rated as hurting rather than helping the real estate markets.
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 measure 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."
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