Business and office parks: how will they succeed in a more conservative marketplace.

In 1971, a group of Georgia Institute of Technology alumni founded Technology Park/Atlanta, in Peachtree Corners north of Atlanta, in an attempt to draw and keep Georgia Tech graduates and their families in Atlanta. Today the park is comprised of 45 office buildings on 570 acres. According to Charles Brown, president of Technology Park/Atlanta Inc.,

Everyone seems more cautious. Fears still loom that the problems of the past will come back to haunt the projects of today.

the company that owns Technology Park/Atlanta, the park is continuing to see great prosperity. "We have three buildings under development right now that we thought about last year and then were able to put together this year at Technology Park." Besides Technology Park, the company is involved with two other business and office parks in the Atlanta area, Johns Creek and Lenox Park, and it's finding success with those, too.

With the approach of the Olympics hanging down on the city, the Atlanta area is experiencing major development, both build-to-suit and speculative. Brown says that, with a stable infrastructure, the city seems able to handle the growing and thriving suburban areas.

While most areas of the country are not seeing the same good fortune as Atlanta, the market seems to be steadily improving across the country. The problems of overbuilding in the 80s that left lenders and developers with empty buildings and low rental rates have diminished. Now as the industry is coming back, a new group of brokers, developers and tenders is emerging. Everyone seems more cautious. Fears still loom that the problems of the past will come back to haunt the projects of today.

"I don't think people have forgotten the pain of the 80s yet," says Kirk Johnson, managing director at Dallas-based Trammell Crow Co. "They're making the speculative decision more carefully than they did in the80s, and you're seeing the spec development pay off for those that are doing it."

For developers without their own financing, money for new speculative developments can be hard to come by. "What we have now are lenders who are much more conservative when they're being approached by developers. So what has resulted is that we don't have much construction at all because most lenders won't consider it until they get really low vacancy rates - historically less than 10%," says Greg Sherwood, national director of the office group for Grubb & Ellis.

"To me it seems on a national basis there's a lot of anticipation of business, yet there's not a lot of business happening," says Richard Hughes, managing director for client services/eastern region for Cushman & Wakefield. "On a national trend, vacancies, particularly in the suburban markets where office parks and industrial parks generally reside, you continue to see an absorption of existing products there.

"Financing has said that you can't really build much bigger than you have a commitment for, and I think the financing market really is just teetering right now on allowing the marketplace to go back and do speculative building because rates have come up in virtually every market across the country," Hughes continues.

But for the companies willing and able to dive into the unknown speculative development arena, the risk is paying off. One of these companies is Atlanta-based Industrial Developments International (IDI).

"Not as many developers are developing space on a speculative basis, but for those who are doing it, like IDI, we're building more spec than we've ever built since we've been formed as a company. The simple reason is that as fast as we Put it up, it's getting taken," says Michael Cushing, senior vice president at IDI.

Northeast question

The Northeast is continuing to fill up existing areas as it waitsfor the day when new construction will be warranted. Still almost no new development is being reported. But business and office parks are continuing to tighten and vacancies are low.

According to the mid-year 1995 office market report by ONCOR International Houston, the Northeast is still struggling with vacancy rates over 10% so there is not much cause yet for new development. For the areas outside the CBD, vacancies were 12.1% for Boston, 14.5% for Pittsburgh, 19.2% for northern New Jersey, 23.5 % for central New Jersey and 20.7% for New York.

In Pennsylvania, the story is one of gradual change. "There is very little new development in Pittsburgh. That area is still trying to lease up what it has," says Bill Robinson, regional leasing manager for Heitman Properties Ltd., Chicago. There i's some industrial development, but nothing new in the way of office space.New build-to-suits in the past few years have created large blocks of vacancy for existing products."

So with little new development and the older products still trying to lure renters, Robinson points out that the industry is facing a new question. "If the story is not that there is a lot of new development, but that things are still moderate and conservative, then the real question is: How do we landlords who still have existing products compete with the threat of new building?"

Robinson answers his question by saying "Landlords are going to have to spend money to try to maintain their facilities." He points out the importance of maintaining good quality and service in order to keep tenants competition from new products.

Ed Hoover, president of High Associates, Lancaster, Pa., says that even though there is no new construction, the area is tightening up. "Our spaces are almost 100% filled, but we're seeing nothing new right now in the way of construction and in Pennsylvania."

Southeast spec

The Southeast is enjoying vacancy rates lower than many other areas of the country. In ONCOR'S mid-year 1995 office market report of vacancy rates outside the CBD, Nashville, Tenn., was one of the lowest with 5.2%, with Miami at 8.2%, Atlanta at 10% and Washington D.C., at 11.5%. Some areas still were a little high but remained lower than the national average, while Orlando, Fla., just matched the average of 15.5%.

With warmer weather and prospering big cities, the suburban markets in the Southeast are reaping the rewards of new development. Atlanta is seen by many around the country as being one of the best areas right now, ahead of most of the country in terms of new development.

"I don't think there's any question. Atlanta's been a city that has enjoyed a very healthy situation," says Michael Siegel, executive director at New York-based Edward S. Gordon Co.

"Activity in office and business parks this year is greatly increased with a lot more activity in our parks and others. We're experiencing a 99+% occupancy," says Brown of Technology Park/Atlanta Inc. "Overall development is greatly increased. The activity and desire and needs of people is increasing, and the real estate industry, ourselves and others, are moving to meet those demands.

I think there's activity in other places, but I think the realization of that is more in Atlanta than other places right now," Brown says. "We're probably a year or two years ahead in that sense. The talk and the activity here is turning into construction and leases."

Brown sites the approach of the Olympics as one reason for the city's success as well as good quality of life, state government and transportation. He says people come to Atlanta because they like the quality of life they find. "And in today's service-based economy, which is very people oriented, the success of your company depends on the kind of people you're able to recruit. Companies want good people, good people like good quality environments. Other cities do that too ... and those are the ones where I guess you're seeing growth."

According to Brown, speculative buildings are rapidly filling up. "While we've averaged 200,000 to 300,000 sq. ft. a year, we're now probably going to go at a rate of 400,000 to 600,000." In a city that's been very comfortable with a 10% to 15% vacancy rate, Brown says they've been sitting around now with only 3% to 8% vacancies.

George McKenney, senior vice president of CARTER, agrees that the Southeast is doing well, but some areas are not as active as Atlanta.

"In Atlanta, rental rates have jumped dramatically, but in Birmingham, Ala., rental rates are still lower than necessary to justify new construction," McKenney says.

"Coming off the last five years, people are still concerned with having too much product," McKenney continues. "Rental rates are getting there, and in certain pockets, you're going to see some construction, although very selective."

In Maryland, activity is improving, according to Mitch Rutter, president of Essex Capital Partners, New York. Montgomery County is seeing continued tightening . Gross absorption increased over 41% in Maryland in the last year. In Rockville, Md., all the signs seem to point to construction. The city of Rockville has an 8.7% vacancy rate compared to 14.5% for Montgomery County. Essex Capital Partners is working on the development of Rockville Center, a planned 1.5 million sq. ft. mixed-use development scheduled to have more than 1.2 million sq. ft. of first-class office space.

Things also are going strong down in Florida, according to Rudy Prio Touzet, managing director of the South Florida office of Cushman & Wakefield. "All of Florida is experiencing the same types of activity," says Touzet. "Florida is one of the better ones. It recovered faster than many others in the rest of the country. As a result we're also getting a lot more institutional interest on the acquisition side. We were out of the distressed sales market for quite a while. We're seeing a lot more pension fund and institutional interest in the acquisition of both office and industrial."

Touzet notes that the office parks in South Florida are doing exceptionally well.He says Dade County is probably leading in that category with vacancies in about the 9% range. "All in all we've seen consistent increases in rental rates. Absorptions have been good with low vacancy rates," Touzet says. "Dade recovered first. Broward and Palm Beach are seeing pretty dramatic increases this year. In some submarkets we've seen double digit percentage increases in rents."

Midwest spec opportunities

In the Midwest area some have grabbed the reigns and are racing ahead with new development full force. There is some speculative construction in the Midwest, and for the adventurous, there are many rewards. The market is rapidly tightening, and with vacancies dropping, it is only a matter of time before the area will call for others to begin new development.

"Chicago is extremely active. As a developer who has distanced ourselves from other developers in the past few years, we are having an even more active year in '95 than in the past couple of years," says Cushing of IDI. "The most striking phenomenon is the very quick absorption of space built on a speculative basis. But for the most part, the products that are going up are seeing preleasing - mostly industrial."

The Chicago area is experiencing a lot of development on the build-to-suit side, but there hasn't been much speculative activity. However, Westchester, Ill.-based Podolsky & Associates is taking the plunge and starting some speculative pro- jects. And even though Podolsky's ventures have been successful, for now they are the only ones out there.

"People in the industry, as well as many walks of life, have short memories so I think the money will be coming back," says Randy Podolsky, president of Podolsky & Associates. "But we were the first, and I think there will be a big gap between us and the next guys." Podolsky & Associates broke ground in February on the 221,000 sq. ft. tower at Westbrook Corporate Center, and the firm plans to deliver the first spaces by the end of the year.

Class-A vacancy in the city of Chicago as a whole is still not below 10%, but it's getting better. "And it's doing better faster than anyone thought it would," Podolsky says.

Geoffrey Adaire of LaSalle Partners, Chicago, also notes that while the market is improving, true speculative building is still rare for the area. "Podolsky put up Westbrook Corporate Center. That's the first truly speculative office building to go up in about six or seven years, and it's going to meet with tremendous success. It gives you an indication of how healthy this market is.

In the suburban areas 28 miles outside Chicago, things are improving even faster. "That area wasn't hit as hard as the downtown Chicago area," Adaire says. "The demand kept up, and there weren't huge vacancy rates.It was a favorable place to relocate."

One successful office park sitting outside Chicago is Cantera in Warrenville, Ill. Adaire is the director of marketing and leasing for Cantera, a 650-acre mixed-use development. The site is owned by Warrenville Development LP, a partnership of LaSalle, Amoco Corp. and Elmhurst-Chicago Stone Co. Ground is broken for the first industrial building at the site and in the spring, work will begin on a 220,000 sq. ft. office building for the Amoco Corp.

Hopefully the real estate market won't tank like it did five or six years ago," Adaire says. "But if it keeps on going, we think we're well poised to take advantage of what we see as a great new development."

Adaire notes that there is money to be had for some development, but lenders do require some preleasing. "There are several developments out here, Cantera included, where if we get a large anchor tenant, 30,000 sq. ft. and up, then we will go ahead and build a semi-speculative office building."

The Minneapolis area also has improved fairly dramatically over the past few months. Vacancies in some submarkets in the Class-A office space have dropped below 5%. According to Jeff Eaton, vice president of brokerage services for United Properties, the improvements have sparked discussion about where new developments will be. United Properties is considering four new projects now, and it is in the process of looking for anchor tenants. There is no spec development for office buildings yet, and Eaton suspects it is still 12 months away.

But in the industrial market there is still substantial construction, and the requirement for preleasing seems to be a lot lower in the industrial sector than in office. "We've seen a lot of projects kick off with less than 50% preleasing, and in fact lately, we've seen projects with 0% preleasing, 100% spec. A lot of those projects have been fully leased b the time their construction was completed. That kind of activity is pretty heavy right now," Eaton says.

In the office market, net rates aren't quite where they need to be to justify more office development, Eaton says. "They need to be in the $14 to $16 range and we are just below that. So we still have a little work to do in net enhancement."

"Minneapolis is very strong," says David Gruber, president of MEPC. There is not much available cash right now for new office projects, he says, but "it is definitely improving every day."

"Minneapolis and Indianapolis have done extremely well this year as rental rates have spiked," says Bill Robinson, who covers those areas for Heitman's properties are experiencing a 96% occupancy rate.

Robinson, says the Minneapolis and Indianapolis areas never really experienced the big dips the rest of the country faced. "We have maintained high occupancy rates even through the hard times."

Southwest strengthens

Oncor International reports that vacancies in the Southwest are still low, with Dallas and Houston at 15.6% and 20.2%, respectively, for mid-year 1995.

Henry Knapek, president of the Bradford Co., also says that things in the business and office park market are still struggling in the Southwest.

"The CBD is still hurting, but the suburban areas are increasing significantly. The overall occupancy for the area is about 80%," say Knapek, "and the downtown area is even lower than that. But we're beginning to see rental increases." Knapek sees the industry steadily improving over time.

There are some new projects in the suburban areas. Plans are under way for a three-building speculative office and warehouse project in Plano, Texas, that Bradford is building on behalf of the institutional investor Northwestern Mutual Life Insurance Co. Located on the Plano Parkway, it will be a 17-acre, 325,000 sq. ft. project. However, Knapek says this is one of the only new projects in the area.

Westward ho!

Overall, the market in the West seems to be very strong. For the mid-year 1995 office market report, Oncor reported vacancy rates of 9.4% for Portland, Ore., 9.9% for San Francisco and 11% for Denver. Some cities still had fairly high vacancy rates, however, like Los Angeles with 17.3%.

One particular area that's doing well is Salt Lake City. According to Debra Ekins, CCIM, and Marty Plunkett, CCIM, both of Wallace Associates, Salt Lake City, the vacancy rate for 1995 for Class-A products is 3.6% and 7.3% for Class-B.

In Salt Lake City, Cottonwood Corporate Center, a 44.5-acre suburban office park in Southeast Salt Lake Valley, is being developed by Wallace Associates. The project is expected to be comprised of 10 buildings and 860,000 sq. ft. of office space. Right now the site is being leveled and utilities are being installed.

As for the future of the Salt Lake City area, Ekins and Plunkett are optimistic.

"We feel our market here is just going to get better and better over the next couple of years, especially with the announcement of the Olympics in 2002," Plunkett says. "We see it continuing. There will be more people coming on line, but we still see the demand strong."

In California, things are still not up to speed. According to Maury Gentile, senior vice president, downtown Los Angeles or Grubb & Ellis, while vacancies are going down, there is almost no development in the office market.

Grubb & Ellis reports that so far in 1995, the Greater Los Angeles office market has an inventory of 56.7 million sq. ft. with 11.9 million sq. ft. of available space.

"Los Angeles has a lot of submarkets, other than downtown, with single-digit vacancies," Gentile says. "And there is, proposed development on the horizon for '96 or '97, but downtown Los Angeles is still having a hard time."

Where to next?

"There's no question, just about every single market in the country is seeing a better year this year in terms of absorption and firming of rental rates," says Johnson of Trammell Crow.

The best news for business and office parks is that there does not seem to be any dark clouds looming overhead.

"I think there would be cause for cautious optimism. Things are fundamentally different today than they were during our last development cycle," United Properties' Eaton says. "That will contribute to controlled development, and without so much speculative development being brought into the market, the pace will be more cautious, and I think that will keep us from falling out of balance again."

Hughes of Cushman & Wakefield points out the great opportunity for the local developers because they can find the holes and fill the needs of their particular market. "Small companies or a big company with local workers making specific decisions for that area - those are the kind of people that will have their pulse on the marketplace," he says.

"I think we've all learned that the good news is that the institutions have a long memory, but they have a short memory when it comes to lending for real estate opportunities, and I think the money is coming back into the market, says Edward S. Gordon's Siegel. "It's there - for the right project, it's certainly there."

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