SIOR Commercial Real Estate Index Reflects Country’s Economic Woes

    WASHINGTON, Aug. 20 /EMWNews/ -- The Second Quarter 2008

SIOR Commercial Real Estate Index, compiled by the Society of Industrial

and Office Realtors (SIOR) in association with the National Association of

Realtors (NAR), indicated that commercial real estate markets have not yet

begun their rebound to market equilibrium. The national Index, which

measures 10 variables pertinent to the performance of U.S. industrial and

office markets, dropped for a sixth straight quarter to an overall total of

76.4 points. This point drop placed it 23.6 points below the 100 point

criteria that represents a balanced office and industrial marketplace and

43 points below its record high in spring 2006.



    The SIOR Commercial Real Estate Index is a diffusion index (see

Methodology) where a score of 100 indicates markets in balance. A score of

76.4 reflects conditions that are significantly less favorable for

landlords and sellers, but excellent for tenants and purchasers.



    SIOR commercial real estate professionals provided their views on

second quarter 2008 market conditions in their respective markets in a July

survey.



    An unprecedented number of SIOR members -- 83 percent -- report that

their local markets are feeling the impact of the decline in the national

economy. This number is 59 percent higher than just one year ago. Leasing

activity is down according to 75 percent of respondents. Concessions

benefiting tenants are riding above normal and have increased 29 percent

from the same quarter one year ago. Twenty-three percent of respondents

indicated that there was virtually no new construction going on in their

marketplace and according to 67 percent of respondents construction in

general is down. Concerns about where the economy is heading are clearly

impacting commercial real estate business -- and will continue to do so as

50 percent of respondents predict a 1-15 percent decline in activity for

3rd quarter 2008.



    Office Market



    The Office Market has been particularly hard hit, scoring only 67.8

points -- down almost 48 points from the same period last year and 32

points below equilibrium -- the lowest Index value since SIOR began the

Index in fall 2005.



    Industrial Market



    The Industrial Market Index, at 68.5 points, is barely stronger than

the office market, and is more than 53 points off its 1st quarter 2006

high.



    Regional Breakdown



    The Northeast, with 76.4 points, comes in second best after the South.

Prices for investment property are well below replacement cost in this

region, making it unprofitable to build. In addition, sublease space in the

Northeast is a bigger issue than it is in the South or West.



    Underperforming all regions, the Mid-West tallied a score of 73.1 --

the lowest Index value for 2nd quarter 2008. Respondents from the region

indicated that sublease space continues to be a negative influence in their

region, tenants are in a good bargaining position to obtain moderate to

deep concessions, and they are definitely witnessing a buyers' market.

Respondents from the region are the most pessimistic about the next three

months and most blame the overall national economy for market woes.



    Respondents from the South, with an Index score of 84.6, were the most

optimistic about the next three months. The only region to escape a decline

in rental rates, the South felt that the vacancy situation, although worse,

was not significantly so; sublease space was not a big issue; and

respondents reported that investment markets were in balance.



    The West, weighing in with an Index score of 68.4 points, experienced

the greatest decline in positive attitudes regarding the state of the

office and industrial markets citing the housing downturn as a factor.

Respondents from that region are reporting higher vacancy rates, deeper

concessions for tenants, meager development activity, and a high rate of

pessimism for their three month outlook.



    METHODOLOGY



    The SIOR Commercial Real Estate Index is constructed as a "diffusion

index," a very common and familiar indexing technique for economic

measures. Other examples of diffusion indexes include the Index of Leading

Economic Indicators, the Consumer Confidence Index, and the Institute of

Supply Management's Purchasing Managers' Index. In the SIOR Commercial Real

Estate Index, a value of 100 represents a well-balanced market for

industrial and office property. Values significantly lower than 100

indicate weak market conditions; values significantly higher than 100

measure strong market conditions. The theoretical limits of this Index are

a low of zero, and a high of 200, though it is unlikely that such limits

would be approached as long as the property markets are operating

efficiently.



    The Index is based on a survey questionnaire with ten topics. The

topics covered are (1) recent leasing activity; (2) trends in asking rents;

(3) trends in vacancy rates; (4) subleasing conditions; (5) levels of

concession packages in leases; (6) development activity; (7) site

acquisition activity; (8) investment pricing levels; (9) the impact of the

local economy on the property market; and, (10) the effect of the national

economy on the property market. Survey respondents are given five choices.

For each topic, five choices are provided, corresponding to conditions that

are very weak, moderately weak, well-balanced, moderately strong, or very

strong.



    For each question, answers are tallied and the percentage of responses

for each of the five choices is calculated. If survey panelists indicate

"very weak" conditions (the "a" choices in the questionnaire), the answer

is assigned 0 (zero) points; "moderately weak" ("b" answers) earn 5 points;

an indication of "market balance" ("c") receives 10 points; "moderately

strong" indications ("d") score 15 points; and "very strong" ("e")

responses receive a maximum 20 points. Thus a score of 10 for a given

question can be earned if responses are evenly distributed across all five

choices, if all responses were "c", or if the answers form a "bell-shaped

curve" centered around the "c" choice. The total index value is derived by

summing the scores for all ten questions. Index values for each of the two

property types are similarly calculated.



    The survey was developed by Hugh F. Kelly, CRE, clinical professor at

New York University, who worked with SIOR on research projects since 1989.



    Headquartered in Washington, DC, the Society of Industrial and Office

Realtors (SIOR, http://www.sior.com) is a global professional organization that

certifies commercial real estate service providers with the exclusive SIOR

designation. Individuals who earn their SIOR adhere to the highest levels

of accountability and ethical standards.



    Only the industry's top professionals qualify for the SIOR designation.

Today, there are more than 2,800 SIORs in 590 markets in 23 countries.