Wednesday, May 30, 2007

Hoston Texas 3rd in Nation Population Growth

Atlanta and Dallas have led the nation in population growth since 2000, but these Sunbelt metros continue to show stubbornly high office vacancy rates. The two cities added more residents than any other metro area in the country between April 2000 and July 2006, according to recently released statistics from the U.S. Census Bureau. Yet both markets are plagued by high office vacancies due to a steady flow of projects coming on line.
Demographics do matter a lot. But there are plenty of other considerations that investors
need to think about like new supply,” says Bob Bach, national director of
market research at Chicago-based Grubb & Ellis. “If a metro doesn't have
population growth, it'd better have barriers to entry.”
Partof the problem is that cheap debt financing and rosy economic forecasts have
spurred new, chiefly speculative, office projects. Both Atlanta
and Dallas grew
office supply by 1.1% and 1.3% respectively as a percentage of total inventory
in 2006, compared with the national average of 1%.
One enabling factor is that abundant land and development sites envelop both
metros. In 2001, for example, the total square footage of new office projects
completed in Atlanta and Dallas represented approximately 10% of all
office completions across the nation that year.
Atlanta is a case study in how busy developers can dilute leasing demand. The influx of roughly 890,000 new residents pushed metro Atlanta's
population up to 5.1 million last July. It was a similar story on the jobs
front: Labor growth increased by an average of 4.7% annually between 2000 and
2006, outpacing the national average of just 3.3%.
So why did the Atlanta metro office market post a 19.3% vacancy rate for the first quarter of 2007?

Some 3.7 million sq. ft. of office space came on line in the first quarter, and
60% of those projects occurred on a speculative basis.
“Atlanta is still recovering from the last recession
because the negative economic growth was much deeper there than in most other
cities,” says economist Rajeev Dhawan, director of economic forecasting at Georgia State University's J. Mack Robinson College of Business.

Brisk hiring over the past few years simply hasn't kept pace with the new office
supply, he says, notably in the metro market, where the office inventory grew
by 1.49 million sq. ft. in 2006, and only 47% of that new supply was
pre-leased.
Over in Big D, the nation's second fastest growing metro since 2000 with 842,449 new
residents, new supply is also muffling population and job growth trends. With
roughly 5 million sq. ft. of new office construction in the pipeline at the end
of March, few expect the sickly 19.8% vacancy rate to suddenly contract.
Dallas ranked as the seventh
strongest office market for total leasing absorption during the first quarter,
with roughly 440,000 sq. ft. in net absorption. Dallas has the largest concentration of
corporate headquarters in the nation.
A favorable year-round climate and a high quality of life have attracted many
businesses to the sprawling city. Recently Comerica Bank announced plans to
relocate its headquarters from Detroit to Dallas, where it will
house 200 senior-level employees.
Corporate expansions are critical to any office market, but demand can easily be
sidelined by new supply. And to many market watchers, therein lies the rub. As
Bach notes, “It's just too easy to build in these markets.”
POPULATION GROWTH: NOT A CURE-ALL FOR SOME
OFFICE MARKETS
The office
vacancy rate among the top five fastest-growing metro areas averaged 15.4% at
the end of March, well above the national average of 13.1%.




Major
Metro


Population
Growth*


Office Vacancy
Rate 1st Quarter 2007





Atlanta


890,211


19.3%




Dallas


842,449


21%




Houston


824,547


12.9%




Phoenix


787,306


12.6%




Riverside, Calif.


584,510


11.4%




* population growth from April 1, 2000 through July 1, 2006




Sources: U.S. Census
Bureau, Reis Inc.


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