When will the next skyscraper be built?

[Howard Huge]

Some comparative office stats from Grubb & Ellis are provided below. But be careful about reading too much into these snapshot indicators, especially as they pertain to the likelihood of new construction. Each city has unique factors affecting it, especially with respect to their economy, geographic barriers to entry as reflected in the land prices, political barriers to entry, property tax and corporate income tax rates, unionization rates within the construction trades, exposure to the credit crisis, and submarket desirability. Additionally, these data only indicate asking rents, not actual effective rents that take negotiated concessions into account.

Dallas is a good case in point. Downtown Dallas has nearly as much vacancy as downtown Detroit and lower rental rates to boot. I don't know of any developer that'd be interested in starting a project there even if financing were available. However, just opposite a freeway from downtown is an office submarket with buildings that are still under construction, where vacancy is 14.2%/16.6% and rents for Class A space are $32.03 psf. That's not horrible (like Atlanta), but it doesn't reflect in the CBD stats.

Chicago is another good case in point. On the surface of things, it looks slightly distressed but still has relatively high rents. It looks like they ought to still be able to cope with things. But in truth, the prevalence of "zombie buildings" is distressing the whole market, and the impact to investors has yet to be fully reflected in a snapshot of market data.

New York is probably the best case in point that there ever was. Out of every city on this list, rents there are the highest and vacancy is the lowest. But .and is expensive, the bureaucracy is tough, union labor is expensive and entrenched in practically every construction and property management function, and taxes are utterly ridiculous. There was a time in the not-so-distant past that that didn't matter. Class A rents used to average about $90 psf, concessions used to be unavailable, and vacancy used to be <4%. So stuff got built--sometimes--and even then, only eventually. But in the context of where it had been, NYC has suffered more than any other city, and with current owners unable to refinance, there will be a tremendous glut of inexpensive office buildings available to any of the investors left standing for many years to come. Why build when you can buy something relatively new for bottom dollar? Aside from one project in Midtown Manhattan, the only still-active construction is related to the WTC redevelopment, and that was only made possible on account of insurance proceeds and an insane amount of state and municipal leasing of space within those symbolic buildings.

Detroit is by far the worst out of any city, but at least the decline there was steady and predictable. Real estate prices are crazy low, but should be more stable going forward. NYC's toughest days are ahead of it. And as for Houston, we may be hanging on...barely...but aside from that vacancy is increasing and that effective rents are coming down, aside from that commercial foreclosures have begun to become problematic, aside from that debt financing remains elusive, we (in particular) are fraught with political risk. Energy and environmental policy could still whoop our ass even if the rest of the economy begins to recover in earnest.

City, Submarket - Direct Vacancy - Aggregate Vacancy - Class A Asking Rent

Houston, CBD - 10.7% - 11.9% - $35.75

Dallas, CBD - 24.9% - 26.4% - $21.95

Ft. Worth, CBD - 8.7% - 9.1% - $27.98

San Antonio, CBD - 11.3% - 18.3% - $21.69

Atlanta, CBD - 19.2% - 22.2% - $21.13

Miami, CBD - 12.4% - 14.8% - $43.16

Chicago, CBD - 14.2% - 16.7% - $38.62

Detroit, CBD - 29.3% - 29.6% - $23.37

Washington DC - 11.3% - 13.1% - $54.69

Los Angeles, CBD - 12.9% - 14.1% - $38.52

San Francisco, Financial District - 12.2% - 14.0% = $32.90

Seattle, CBD - 17.6% - 18.9% - $32.90

New York, Manhattan - 7.0% - 9.4% - $65.47

Wow. You are awesome.

So if you discount Ft. Worthless (which I do) we are pretty much second behind New York with the lowest vacancy percentage.

Not bad

[citykid09]

Wow. You are awesome.

So if you discount Ft. Worthless (which I do) we are pretty much second behind New York with the lowest vacancy percentage.

Not bad

So I guess that would mean, Houston and New York will be the first to see many new building going up? I don't think so I will bet that developers still will see the need to build in Miami, Chicago, etc. It would be great though if Houston saw a Miami type boom in downtown or in the Galleria Area.

[TheNiche]

So I guess that would mean, Houston and New York will be the first to see many new building going up?

NO! Read the narrative that accompanied the stats.

[AtticaFlinch]

NO! Read the narrative that accompanied the stats.

Hah! Remember what I wrote about how it's pointless to write more than a paragraph or two as nobody but the diehards will read past that point?

At least the OP read your entire post, so that's some kind of victory.

[wernicke]

Dallas vacancy rates within earshot of Detroit's... pretty bad. Fort Worth could handle another office tower.

[TheNiche]

Dallas vacancy rates within earshot of Detroit's... pretty bad.

You didn't read the narrative either.

Fort Worth could handle another office tower.

Downtown Fort Worth is a relatively stable submarket, but it is small (about a quarter the size of downtown Houston) and its prospects for growth are weak. I'd say that one or two new mid-rise office buildings over the next decade is plausible, however a new speculative building even the size of Houston's MainPlace would about double the vacancy rate and require achievable rents that are significantly higher than market conditions allow. So a skyscraper in Fort Worth is not plausible.

Of course, if you'd read the narrative, then you'd know better than to try jumping to such conclusions based on evidence that I had already established as superficial.

[Houston19514]

You didn't read the narrative either.

One could read every word of your narrative, and agree with it, and still reasonably make the statement that Dallas's CBD vacancy rate is "pretty bad". Because, let's face it, Dallas CBD's vacancy rate is, by any rational analysis, pretty bad... and has been for, oh, about 25-30 years.

[TheNiche]

One could read every word of your narrative, and agree with it, and still reasonably make the statement that Dallas's CBD vacancy rate is "pretty bad". Because, let's face it, Dallas CBD's vacancy rate is, by any rational analysis, pretty bad... and has been for, oh, about 25-30 years.

Well yeah, but primarily because Uptown had perennially sucked the life out of it during the boom years. Downtown and Uptown Dallas are in direct competition for the same tenants and ought to be considered the same submarket for purposes of comparison with other CBDs, including Houston.

[Howard Huge]

Well yeah, but primarily because Uptown had perennially sucked the life out of it during the boom years. Downtown and Uptown Dallas are in direct competition for the same tenants and ought to be considered the same submarket for purposes of comparison with other CBDs, including Houston.

I was thinking the same.

Last time I was in Dallas, we were driving through downtown and my host pointed across the street and said, "thats uptown."

I remember thinking, "It's literally across the street, pretty lame to call that "uptown."

[HTX]

At what point does the high rent in New York combined with tax situation up there start to have an visible impact on other cities on the list? Or has it already?

[TheNiche]

At what point does the high rent in New York combined with tax situation up there start to have an visible impact on other cities on the list? Or has it already?

That's been going on for a long time, not only in New York but throughout the Northeast, the Rust Belt, and in California. It's a big part of how sunbelt cities such as Atlanta, Dallas, Houston, Austin, Phoenix, and Las Vegas were able to grow so quickly.

One of the fascinating processes in urban economics that has changed significantly, allowing this to happen, is that it used to be that large headquarters offices required a substantial pool of what used to be thought of as highly-specialized labor to operate effectively. And labor was less mobile, professional and business services were highly concentrated, travel was expensive and time-consuming, and communications were delayed and sometimes unreliable. All this fostered an economy based on agglomeration. The larger a city's population became, the more unique amenities could be supported, creating more reasons for more companies and more people to live there. It justified continual disproportionate population growth and increasing per capita wealth in only a handful of global cities.

Today, the world's two largest corporations are based in Irving, TX and Bentonville, AR. And up until recently, the world's largest bank was headquartered in Charlotte, NC. Clearly some urban amenities still matter, like hub airports. But (aside from specialty engineering-intensive industries like energy and high tech) it isn't enough just to have the right kind of people in your town anymore. People will relocate with the company, particularly if the pay buys them a better lifestyle than would otherwise be the case in a huge city like NYC; and if not, the company can easily lure enough of the tens of thousands of new MBAs that get cranked out of podunk college towns each year.

Honestly, I think that the only reasons that NYC experienced any population growth at all in the last decade were that it's a huge destination for immigrants (which is reflected in Census migration stats) and that it happened to take part in the financial boom/bust cycle. I don't think that this decade will be nearly so kind to NYC.

[Houston19514]

Well yeah, but primarily because Uptown had perennially sucked the life out of it during the boom years. Downtown and Uptown Dallas are in direct competition for the same tenants and ought to be considered the same submarket for purposes of comparison with other CBDs, including Houston.

Whatever the reason, it is what it is. And YOU may think they should be considered the same submarket, but every commercial real estate analysis I've ever seen, considers them separate submarkets. I'm sure they must have some reason for that.

For purposes of the comparing CBDs, it only makes sense to compare CBD submarket numbers. Every CBD has reasons/excuses for it's high or low occupancy rates, as the case may be. (And nobody is better at manufacturing excuses than Downtown Dallas boosters) Houston's CBD would be healthier than it is if it weren't for the direct competition from Houston's uptown submarket, but that doesn't make Uptown Houston the same submarket as Houston's CBD.

[Houston19514]

Well yeah, but primarily because Uptown had perennially sucked the life out of it during the boom years. Downtown and Uptown Dallas are in direct competition for the same tenants and ought to be considered the same submarket for purposes of comparison with other CBDs, including Houston.

Even if they were considered the same submarket (and as I mentioned above, nobody in the office market profession does), let's take a look... According to Grubb & Ellis, which I believe is the source of your numbers above, the combined Dallas Uptown/CBD submarket would have a vacancy rate of 23.5%. Still what one might call "pretty bad" and second only to Detroit.

[TheNiche]

Whatever the reason, it is what it is. And YOU may think they should be considered the same submarket, but every commercial real estate analysis I've ever seen, considers them separate submarkets. I'm sure they must have some reason for that.

There are plenty of good reasons for breaking out smaller submarkets if you're a purveyor of market data. A client of Grubb & Ellis, for instance, may want to cite the Uptown stats only if they're trying to sell a building in Uptown, or cite Downtown plus Uptown stats if they're trying to sell a building Downtown. These aren't the only submarkets where tricks like that work, either. I've seen them applied to Greenway/Uptown locally. Another thing to consider about such firms is that submarket boundaries are legacy issues and can be a real hassle to change; you typically only see that happen if there is a major upgrade in technology.

Of course, these firms are merely secondary sources to developers, lenders, investors, management companies, brokers, appraisers, consultants, etc., who generate their own analyses to suit their specific needs. And generally speaking, you can be assured of bias in favor of their clients' interests, whoever that happens to be. For instance, an underwriter for a bank will look at the data more cautiously than would the underwriter for a mortgage broker. They have differing objectives.

Speaking as someone who has written dozens such analyses for every kind of client, I'd say that if you're using the phrase "every commercial real estate analysis I've ever seen" to describe just about any facet of an analysis, then I'm guessing that you're something of a specialist and don't see much variety.

For purposes of the comparing CBDs, it only makes sense to compare CBD submarket numbers. Every CBD has reasons/excuses for it's high or low occupancy rates, as the case may be. (And nobody is better at manufacturing excuses than Downtown Dallas boosters) Houston's CBD would be healthier than it is if it weren't for the direct competition from Houston's uptown submarket, but that doesn't make Uptown Houston the same submarket as Houston's CBD.

That's pretty weak.

Do you realize that a person intending to drive from Downtown Houston to Uptown Houston via US 59 would have to travel 6.7 miles? They'd witness a distinct change in the character of office buildings the moment that they pass under the Pierce Elevated, and again the moment that they take the left turn onto Westheimer and emerge from under 610. They'd also pass through other distinct office submarkets en route and would probably notice that the transportation infrastructure and the number and types of amenities available in each of the two submarkets is vastly different.

Compare that experience to a driver en route from Downtown Dallas to Uptown Dallas, which is about 220 feet as the driver (or pedestrian) crosses over the Woodall Rogers Freeway. Of course, rounded off to the nearest tenth of a mile, as was cited above, the distance amounts to 0.0 miles. The character of the office buildings does not dramatically change except insofar as that they tend to be newer.

[citizen4rmptown]

That's pretty weak.

Do you realize that a person intending to drive from Downtown Houston to Uptown Houston via US 59 would have to travel 6.7 miles? They'd witness a distinct change in the character of office buildings the moment that they pass under the Pierce Elevated, and again the moment that they take the left turn onto Westheimer and emerge from under 610. They'd also pass through other distinct office submarkets en route and would probably notice that the transportation infrastructure and the number and types of amenities available in each of the two submarkets is vastly different.

Compare that experience to a driver en route from Downtown Dallas to Uptown Dallas, which is about 220 feet as the driver (or pedestrian) crosses over the Woodall Rogers Freeway. Of course, rounded off to the nearest tenth of a mile, as was cited above, the distance amounts to 0.0 miles. The character of the office buildings does not dramatically change except insofar as that they tend to be newer.

Why would the "character" of the buildings matter? Also, I'm no expert on Dallas, but isn't Uptown Dallas largely resedential and hotel? While Downtown Dallas largely office?

So, they don't neccesarily compete with each other in terms of, say, attracting a resedential building which would most likely be built in Uptown as opposed to Downtown. If your talking about growth, I can see how Uptown competes with Downtown. But like I said, no expert, so don't take me too seriously.

[TheNiche]

Why would the "character" of the buildings matter?

You wouldn't want to try to lump an office submarket where buildings tend to be small, low- or mid-rise, and often have surface parking with an office submarket where most buildings are highrises with structured parking. Different kinds of structures appeal to different kinds of tenants. Think about how this works out in Midtown Houston as opposed to Downtown Houston.

Also, I'm no expert on Dallas, but isn't Uptown Dallas largely resedential and hotel? While Downtown Dallas largely office?

There are hotels and residential uses in both Downtown and Uptown Dallas, however there is definitely more residential in Uptown. Not sure how that would impact the office market, though.

So, they don't neccesarily compete with each other in terms of, say, attracting a resedential building which would most likely be built in Uptown as opposed to Downtown. If your talking about growth, I can see how Uptown competes with Downtown. But like I said, no expert, so don't take me too seriously.

The discussion to this point has largely focused on office buildings, and the definition of submarkets varies by land use.

[RedScare]

Perhaps the biggest reason to keep Downtown and Uptown as separate sub-markets is that they are legally distinct areas. The City of Dallas CBD is defined as that area within the freeway loop, of which Woodall Rogers is the northern boundary. CBDs are treated very differently than the rest of the city in terms of building setbacks, parking, and numerous other issues of particular interest to building developers. While one looking to lease may not notice the distinction (as he would be looking at existing buildings), one looking to buy would be very interested in whether the submarket was the actual CBD, or merely very near downtown, as it could drastically affect what could be built on the property.

[TheNiche]

Perhaps the biggest reason to keep Downtown and Uptown as separate sub-markets is that they are legally distinct areas. The City of Dallas CBD is defined as that area within the freeway loop, of which Woodall Rogers is the northern boundary. CBDs are treated very differently than the rest of the city in terms of building setbacks, parking, and numerous other issues of particular interest to building developers. While one looking to lease may not notice the distinction (as he would be looking at existing buildings), one looking to buy would be very interested in whether the submarket was the actual CBD, or merely very near downtown, as it could drastically affect what could be built on the property.

Red, it's called a variance request. And we ARE after all talking about DALLAS. Everything is for sale there.

Oops, I've said too much.

[Houston19514]

There are plenty of good reasons for breaking out smaller submarkets if you're a purveyor of market data. A client of Grubb & Ellis, for instance, may want to cite the Uptown stats only if they're trying to sell a building in Uptown, or cite Downtown plus Uptown stats if they're trying to sell a building Downtown. These aren't the only submarkets where tricks like that work, either. I've seen them applied to Greenway/Uptown locally. Another thing to consider about such firms is that submarket boundaries are legacy issues and can be a real hassle to change; you typically only see that happen if there is a major upgrade in technology.

Of course, these firms are merely secondary sources to developers, lenders, investors, management companies, brokers, appraisers, consultants, etc., who generate their own analyses to suit their specific needs. And generally speaking, you can be assured of bias in favor of their clients' interests, whoever that happens to be. For instance, an underwriter for a bank will look at the data more cautiously than would the underwriter for a mortgage broker. They have differing objectives.

Speaking as someone who has written dozens such analyses for every kind of client, I'd say that if you're using the phrase "every commercial real estate analysis I've ever seen" to describe just about any facet of an analysis, then I'm guessing that you're something of a specialist and don't see much variety.

That's pretty weak.

Do you realize that a person intending to drive from Downtown Houston to Uptown Houston via US 59 would have to travel 6.7 miles? They'd witness a distinct change in the character of office buildings the moment that they pass under the Pierce Elevated, and again the moment that they take the left turn onto Westheimer and emerge from under 610. They'd also pass through other distinct office submarkets en route and would probably notice that the transportation infrastructure and the number and types of amenities available in each of the two submarkets is vastly different.

Compare that experience to a driver en route from Downtown Dallas to Uptown Dallas, which is about 220 feet as the driver (or pedestrian) crosses over the Woodall Rogers Freeway. Of course, rounded off to the nearest tenth of a mile, as was cited above, the distance amounts to 0.0 miles. The character of the office buildings does not dramatically change except insofar as that they tend to be newer.

Niche, the fact remainsthat no matter what kind of spin you want to put on it, every commercial real estate market research company (eg Grubb & Ellis, CBRE, etc) considers the Dallas CBD a separate submarket from Uptown Dallas.

And even more important, and more to the original point of this discussion, see my earlier post... even if you are correct that they are the same market, their combined occupancy rate is "pretty bad".

[TheNiche]

LOL Speaking of weak... The fact remains, Niche, that no matter what kind of spin you want to put on it, every commercial real estate market research company (eg Grubb & Ellis, CBRE, etc) considers the Dallas CBD a separate submarket from Uptown Dallas.

Yep, and I explained why from the vantage point of someone who's been there and done that. I win. Go away.

[Houston19514]

Yep, and I explained why from the vantage point of someone who's been there and done that. I win. Go away.

You are too funny. Neither your spinning nor your delusions of grandeur will change the facts. You attempted to explain away Dallas' bad CBD occupancy rates as being due to the exclusion of the Uptown portion of the market. The fact is, when one combines the two markets as you insist be done, the occupancy rate is still quite bad (23.5% according to Grubb & Ellis's numbers) and a little too close to Detroit's for comfort.

[RedScare]

Red, it's called a variance request. And we ARE after all talking about DALLAS. Everything is for sale there.

Oops, I've said too much.

Still doesn't change the fact that the CBD is defined by ordinance, and therefore is worthy of its own sub-market category.

[TheNiche]

Still doesn't change the fact that the CBD is defined by ordinance, and therefore is worthy of its own sub-market category.

Developers will take site-specific "special circumstances" into account as part of their underwriting. Tenants do not. Market analysis is tenant-focused and to that end, submarket definitions are as well.

[RedScare]

You sure seem to be going to great lengths to gloss over the fact that the CBD is a legally as well as clearly defined entity deserving of its own submarket. I find that interesting, since you are usually the one to point out something as clearly defined and obvious as this. But, today you are throwing out terms such as "site specific" and "variance" in your efforts to explain away the legally defined CBD, when in fact those those are examples of why the two sub-markets are separate.

Continue on. I'm enjoying it.

[TheNiche]

You sure seem to be going to great lengths to gloss over the fact that the CBD is a legally as well as clearly defined entity deserving of its own submarket. I find that interesting, since you are usually the one to point out something as clearly defined and obvious as this. But, today you are throwing out terms such as "site specific" and "variance" in your efforts to explain away the legally defined CBD, when in fact those those are examples of why the two sub-markets are separate.

Continue on. I'm enjoying it.

If terms such as "site-specific" or "variance" are beyond you, I'll be happy to provide definitions.

[RedScare]

If terms such as "site-specific" or "variance" are beyond you, I'll be happy to provide definitions.

Nope, no need. The fact that you are using them at all proves my point about the CBD getting its own sub-market designation. And, your original point that there is "little" difference between Dallas' CBD and Uptown areas is still valid. I was merely pointing out that there IS a difference, and it is not subtle. But, I just want to see how long and how far you'll take this.

EDIT for spelling, since I still cannot see what I am typing.

[TheNiche]

Nope, no need. The fact that you are using them at all proves my point about the CBD getting its own sub-market designation. And, your original point that there is "little" difference between Dallas' CBD and Uptown areas is still valid. I was merely pointing out that there IS a difference, and it is not subtle. But, I just want to see how long and how far you'll take this.

Bear in mind, when I'm referring to site-specific factors, I'm not side stepping any issues. I'm talking about issues that affect what a developer can reasonably bring to market on an individual parcel of land that is being offered for sale and that is being considered as a prospective acquisition by a developer. I'm not talking about a district, a neighborhood, a submarket, a city, or anything broader in scope than just that one...particular...site. If a variance needs to be gotten, Dallas is an easy town to get one in. The developer then consults with an architect, who provides structural, density and cost assumptions. Those figures get plugged into the underwriting and market analysis as assumptions. And only once the characteristics of the proposed development are known can an appropriate market area be drawn.

EDIT for spelling, since I still cannot see what I am typing.

Use Firefox.

[totheskies]

Have you walked between Dallas' CBD and Uptown?? There's a big difference... it's called vacant land.

This difference will be eased in a few years thanks to the awesome new design for the park in place of the Woodall Rogers, but even with this link, they are still separate. You have to have some sort of substantial retail and commercial for them to be considered one IMO. The West End would be it, if it weren't struggling to stay afloat.

[TheNiche]

Have you walked between Dallas' CBD and Uptown?? There's a big difference... it's called vacant land.

This difference will be eased in a few years thanks to the awesome new design for the park in place of the Woodall Rogers, but even with this link, they are still separate. You have to have some sort of substantial retail and commercial for them to be considered one IMO. The West End would be it, if it weren't struggling to stay afloat.

Office tenants don't care about vacant land unless they're going to use it for parking.

[HTX]

That's been going on for a long time, not only in New York but throughout the Northeast, the Rust Belt, and in California. It's a big part of how sunbelt cities such as Atlanta, Dallas, Houston, Austin, Phoenix, and Las Vegas were able to grow so quickly.

One of the fascinating processes in urban economics that has changed significantly, allowing this to happen, is that it used to be that large headquarters offices required a substantial pool of what used to be thought of as highly-specialized labor to operate effectively. And labor was less mobile, professional and business services were highly concentrated, travel was expensive and time-consuming, and communications were delayed and sometimes unreliable. All this fostered an economy based on agglomeration. The larger a city's population became, the more unique amenities could be supported, creating more reasons for more companies and more people to live there. It justified continual disproportionate population growth and increasing per capita wealth in only a handful of global cities.

Today, the world's two largest corporations are based in Irving, TX and Bentonville, AR. And up until recently, the world's largest bank was headquartered in Charlotte, NC. Clearly some urban amenities still matter, like hub airports. But (aside from specialty engineering-intensive industries like energy and high tech) it isn't enough just to have the right kind of people in your town anymore. People will relocate with the company, particularly if the pay buys them a better lifestyle than would otherwise be the case in a huge city like NYC; and if not, the company can easily lure enough of the tens of thousands of new MBAs that get cranked out of podunk college towns each year.

Honestly, I think that the only reasons that NYC experienced any population growth at all in the last decade were that it's a huge destination for immigrants (which is reflected in Census migration stats) and that it happened to take part in the financial boom/bust cycle. I don't think that this decade will be nearly so kind to NYC.

I agree with you on that and I probably did not frame my question very well. I was thinking more in terms of a new exodus based on what has been happening in NYC over the past couple of years. There are plenty of reports detailing the taxpayer flight from the city, but not so much the corporate flight.