Certain segments of metro Jackson’s office, hotel and industrial warehouse markets are heading into a promising year, but other segments of the same sectors won’t shake the remnants of the Great Recession.
That’s a key forecast included in Integra Realty Resources/Jackson’s tri-county market “Viewpoint” for 2016.
Stabilized rent rates and fewer vacancies are ahead for metro Jackson’s suburban office market in 2016, the local office of the national market research, valuation, and counseling firm forecast in a new report. On the other hand, the firm’s outlook for Jackson’s Central Business District is a third phase of a recession that has kept vacancy and lease rates stagnant.
The firm which opened on Ridgeland’s Trace Colony Park Drive (Details: (601) 714-1665) slightly more than two years ago prepares its forecasts from appraisals and market research done locally and by Integra’s 57 other offices.
In its forecast for metro Jackson’s industrial market, Integra/Jackson sees further stabilization and continued positive absorption by which new leasing outpaces new vacancies. Leasing of flex space that gives tenants both warehouse and office space is leading the absorption, according to the Viewpoint.
Meanwhile, growth in the hotel market is targeted to parts of metro Jackson with new retail offerings such as Pearl’s Outlets of Mississippi and the older Township and Renaissance retail centers in Ridgeland.
Other sectors such as retail and multi-family housing in metro Jackson and elsewhere in the country will continue to draw investment from abroad, as will the office, industrial and hospitality market, say John Praytor and Jim Turner, principals of Integra Realty Resources/Jackson.
“In 2015 we saw the international market looking to American real estate as a safe haven,” said Praytor, senior managing director of the local office. “The instability globally could be a negative for the stock market but it continues to have a positive impact on our commercial real estate sector,” he said.
Continued low rates in the bond market are also pushing investors toward U.S. real estate, Praytor said.
However, commercial real estate should have more competition for investments once the U.S. stock market shows a sustained rebound, Turner noted.
Praytor and Turner say it’s expected that the final tally on domestic commercial real estate sales volume for 2015 should climb above $500 billion, having reached $370 billion at the end of last year’s third quarter. Transaction volumes have increased by amount $70 million annually over the past few years, they say.
“Transaction volume from 2009 to 2014 has been tremendous,” Praytor said.
Metro Jackson’s Class A, even in the Central Business District, does well. Class B does not, Praytor and Turner say.
While downtown Jackson’s office market – with the exception of Class A properties – has stayed stuck in neutral, the metro’s suburban office market is in a third phase of recovery, Integra/Jackson reported. A significant reduction in new office building construction since 2009 has spurred the recovery, the Viewpoint report said.
“The suburban Class A office space has continued to recover as evidenced by decreasing vacancy rates and the construction of a new five-story 120,000 square-foot multi-tenant office building and adjoining parking garage in the District at Eastover that is 60 percent pre-leased,” the report said.
The Integra survey found suburban Class A getting rents averaging $27 a square foot and occupancies of 92 percent. Suburban Class B also performs well, getting rents of $19 a square foot and occupancies of 88 percent.
The CBD’s Class A offerings leased at an average of $24 a square foot last year and closed 2015 with a vacancy rate of 15 percent. Downtown’s Class B ended the year with vacancies of 35 percent and average lease rates of $16, Integra/Jackson reported.
The Central Business District’s Class A cap rates, a ratio of the property’s total costs and its net income, ended the year at 8 percent, according to Integra/Jackson. The report put Class B cap rates in the CBD at 10.3 percent.
Cap rates for suburban Class A averaged 7.5 percent, slightly above a national average of 7.2 percent. Class B ended the year at 9 percent, compared to 7.9 nationally for suburban office markets.
Typically, tenants in suburban markets have better credit ratings than their CBD counterparts, Turner said, “and may have longer leases, say 10 years. That pulls the cap rate down significantly.”
The suburban office market is only now regaining its balance after the over-building created by the federal government’s post-Katrina tax-free GO-bonds program, Praytor and Turner say.
“Once the GO-bonds ran out, the construction stopped,” Turner said, though he noted small suburban office parks in the metro area are starting to have new construction.
“It has just now got the point it is feasible to build new,” he said.
The Central Business District should gain on the occupancy side as lease rates continue to slide, according to Turner. “Eventually, you will get to the point it is feasible to move back downtown because of the low lease rates,” he said.
However, leverage in lease deals in the metro’s suburban market rests with landlords, Turner said, noting tenants are seeing fewer offers from landlords on property. “They aren’t offering the incentives they were a few years ago,” he said.
The Integra/Jackson report forecasts that downtown Jackson Class A will have annual absorption of 10,000 square feet over the next 36 months, while no absorption increase is forecast for the CBD’s Class B office space over the same period.
Suburban Class A is forecast to have net absorption of 120,000 square feet over the next three years. Suburban Class B is forecast to have 100,000 square feet of absorption over the same period.
Positive absorption is ahead for the metro industrial market, led by flex warehouses going up in suburban areas and filling up with tenants seeking a combination of office and warehouse space, Integra/Jackson reported.
Integra/Jackson sees a longer recovery period for conventional industrial space, a circumstance attributed to high inventory levels and high vacancies.
Overall, however, “expectations are for the industrial market to enter the third phase of a recovery within the next 12 months as the remaining excess inventory continues to be absorbed,” Integra/Jackson’s Viewpoint said.
Though flex industrial leads in the demand category, it makes up only 9.6 percent of the metro’s 22.3 million square feet of industrial space.
Traditional industrial is bringing a slightly quicker return on investment, with cap rates of 7 percent compared with 8 percent for flex space.
Flex, on the other hand, is drawing $1 more in rent rates, with square-foot rates averaging $8 for flex and $7 for industrial. Flex also has a one percentage point edge in occupancies, with a vacancy rate of 8 percent compared to 9 percent for industrial.
On the absorption side, flex industrial will gain 100,000 square feet of absorption annually over the next three years. The report put conventional industrial absorption at 500,000 square feet over the 36-month period.
Absorption of available space for large warehouses is influenced heavily by the national markets. On the other hand, local private investment drives about 40 percent of the metro industrial market, according to Turner.
Locally and nationally, corporate warehouse users are starting to sell their warehouses to switch to long-term leases on the properties, thus freeing up their money for other uses, Turner said.
The Hospitality Market
What growth there is in the metro’s hotel sector is occurring near retail centers and corridors with large drawing power, according to Integra/Jackson’s Viewpoint.
The “limited service” category is expected to stabilize over the next 12 months, though it is forecast to show only a modest increase in value over the next three years, Integra/Jackson says.
As with the metro office market, hotel growth is in the suburban markets, it says. “Highland Colony Parkway got four new hotels in the last 4 months,” Praytor said. “Those occupancy rates are over 90 percent.”
Other suburban properties of longer standing are “pulling a significant draw from the County Line Road corridor,” he added, citing help the hotels to the north are getting from new restaurants and retail offerings.
The Integra/Jackson report forecasts that within a year, limited service hotels will see a balance between occupancies and average nightly room rates. “The one-year to balance tells us we are seeing a market equilibrium,” Turner said.
The report prepared by Praytor and Turner forecast cap rates of 10 percent for full service hotels in the metro and 11 percent for limited service. Factors likely to influence the cap rates are interest rates, the local economy, supply/demand, national economic conditions, the risk premium of private real estate, availability of financing and investment segmentation.
Full service hotels are forecast to see average daily rates of $150 compared to $153 nationally, while limited service rates are forecast at $75 compared to $103 nationally.
Full service hotels are also forecast to see strong average occupancies of 80 percent, beating out their national counterparts by 7 percentage points. By contrast, limited service hotels in the metro are forecast to have 65 percent average occupancies, a rate five percentage points below the national average.
(For copies of the Metro Jackson market Viewpoint reports: Irr.com/Jackson)
BEFORE YOU GO…