Since we addressed leasing activity and net absorption of the office classes last week – I thought it would be interesting to see how lease deal volume and rents compared on a quarterly basis. I had initially run deal volume against leasing activity to verify that they tracked, and they actually match up seamlessly across all office classes. (graphs below)
I assumed I would see deal volume lead rent changes by a quarter or more – for example – Q1 deal volume is high, I would expect to see rents in near future quarters tick upward. I was surprised to only find that happening in B class properties. Class A properties were unique in another way – obstinate landlords. Despite significant drop offs in deal volume (about 33% from 2008’s peak through 2009) rents stayed relatively flat – if class A owners had seen my chart last week then, they probably would be able to justify their inflexibility on the market bottoming. But at the time, they did not have the benefit of knowing the future – and much more likely they were driven by underlying debt obligations and a desire to maintain exclusivity in their property – either way it worked out of them being able to maintain their rent levels (although at the sacrifice of NI). Class B volume actually stayed relatively stable, just like the leasing activity by square feet did in last week’s study – however rents actually adjusted – which is probably a very big reason for the activity stability – landlords were highly responsive to the market – and if you look back a week to view net absorption in class B, you can see why, they were losing occupancy as well.
This illustrates clearly the links between these four statistics. For example, if we are looking at leasing activity vs. asking rents – if leasing activity increases while rents decrease, we would expect to see net negative absorption in previous quarters. However if we had seen leasing activity increasing and rents increasing, then we should expect the underlying net absorption to have been positive in previous quarters. Leasing activity and deal volume are a little trickier, mainly because they reflects the future net absorption and likely price movement. Rent movement though can give us a good guess as to what future leasing activity and deal volume will look like – if rents go down, we would expect leasing activity and deal volume to increase in future quarters as well as absorption beyond the leasing activity and deals.
So again going back through the classes, class B was in many ways the most responsive to the recession. If you look at both charts from this week and last week you can clearly see that when rents peaked, net absorption began to sputter, and landlords adjusted accordingly until about 2Q 2010 – where absorption, rents and deal volume seems to have stabilized and begun recovery.
Class A recovered sooner (also felt the recession sooner), but rents have been stuck in neutral for the last 5 years, just now beginning to see some growth.
And class C, since it acts as both a first office and a last office for organizations, reflects its own market peculiarities.
Source of data: CoStar Group