“Buy low, sell high”, describes the best strategy for today’s commercial real estate market. Driven by low inflation, low interest rates and rising consumer confidence, the US economy continues to improve. The stock market, housing market, and job market have all been ticking up. As a result, the National Office Market vacancy rate has fallen to 11.8% at the end of the 1st quarter 2013. This is its highest point since its bottom of 13.5% in 2010. Net absorption was also positive for the eighth quarter in a row. (Absorption represents the difference between new office space coming on the market and existing office space being leased off the market). The one negative, and it’s a big one, is falling rental rates which have dropped for eight straight quarters to $21.30. This combination of falling vacancy rates and falling rental rates indicates that deals are being done but landlords are negotiating very aggressively. It remains a strong tenants market.
The Long Island economy is also showing signs of rebounding. The jobless rate has fallen to 6.8%, the first time that it has fallen below 7% in two years. Hiring has been greatest in the retail sector, fueled by pent up consumer demand from the recession and the need to replace major items such as cars, furniture and appliances destroyed by Sandy. Improving home sales, coupled with rising home prices have also fueled the Long Island recovery. Home prices in March rose 4.5%, a far cry from negative 2.5% one year ago.
This positive economic news has also been reflected in the Nassau/Suffolk office market. Vacancy rates have continued to show stability at 10.1%. Absorption finally went negative after two years of positive reports due to the 350,000 square foot Canon headquarters in Lake Success coming on the market. Similar to the national statistics, the Long Island average rental rates has continued to drop to $25.53, its lowest point since 2006. This also indicates landlord aggressiveness to do deals. Nassau/Suffolk remains a strong tenant’s market.
As the economy continues to improve, and space continues to get absorbed, the vacancy rate will continue to fall. Eventually landlords will no longer have to negotiate aggressively to do deals. At that point it will become a landlord’s market and the great deals that tenants are now enjoying will become a thing of the past.
Any company with their lease expiring in the next five years should act now to renew their lease to take advantage of today’s tenant’s market. Also smart is locking in a long lease term because when the market does turn to favor landlords, we can expect the average rental rate to SPIKE. So buy low today to avoid buying having to buy high in the future.