2013 report: Commercial space stable, sluggish

10/11/2012 6:43 AM

10/11/2012 6:44 AM

Wichita’s commercial real estate market will likely mimic the area job market in 2013, stable but sluggish.

That’s according to the Martens Cos. 2013 Commercial Real Estate Forecast, released Thursday at the Wichita Area Economic Outlook Conference.

“Job creation, for the most part, drives most segments of the commercial real estate business,” said Tom Johnson, president of Grubb & Ellis Martens Commercial Group. “We don’t see any significant uptick in job creation going into next year. We think it’s going to be a continued slow, steady improvement.”

The forecast, produced every year by the commercial real estate group, looks at four segments of Wichita’s commercial real estate market: industrial, retail, office and investment.

Among those segments, none is a real standout for growth, except for certain subsections of the office market, such as medical.

Of course, the wild cards to any improvement in the commercial real estate sector are a sputtering economy, the presidential election and expiration of the Bush-era tax cuts, Johnson said.

“All of those are going to play into ’13,” he said.

The industrial real estate market is expected to be characterized by rising rents and falling vacancies. The report said demand is increasing for industrial property while the available inventory of suitable space is shrinking. Johnson said there is a supply of vacant industrial space but it is older and “economically unfeasible” for modern industrial users. He said there may be some speculation building in the industrial sector, “but nothing significant.”

“We think rents will probably come up a little bit throughout the year,” he said. Average asking rents for warehouse, distribution and general industrial buildings are below $4 a square foot, the report said.

In the retail market, occupancies are expected to continue to increase. An overabundance of strip centers and properties vacated by big box retailers are being filled. Through the third quarter of 2012, overall vacancies for community, neighborhood, strip centers, regional malls, lifestyle centers and freestanding buildings dropped to 13 percent, the report said. That trend is expected to continue in 2013. Rents could increase from their $10-$15 per-square-foot market average, the report said, provided there is little new construction next year and available space continues to be absorbed.

Class A office space downtown and in east and west Wichita is expected to remain tight. Vacancy rates for class A office are 10 percent, the report said, and will remain relatively low because of a “standstill” in growth of financial and information services jobs. The report also noted that even for the sectors where employment is growing for office users, “the space requirements per office employee continues to trend downward.”

Vacancy rates are 32 percent for Class B office space, and that segment will continue to be challenged in 2013 by stable ownership and convenient parking, the report said. Rent for class A office space — from a $15 per square foot average downtown to the mid-$20 range in outlying areas — is expected to “remain solid,” though that could rise if occupancy remains strong next year.

While there are three Class A office projects planned — the Offices at Cranbrook on 21st near Webb, the planned conversion of the Northrock 14 theater, and Clark Investment Group’s proposed two-story office building at the Waterfront — the Martens forecast does not expect additional new office buildings without developers first having them significantly pre-leased.

Real estate investment activity is expected to increase because the cap rates are higher than what investors are getting from low rates on certificates of deposit and Treasury bills. But the real estate investment market is challenged by investors who are already in it and unwilling to sell their investments because of the steady income it is bringing in. Investment in multifamily real estate has been the “most viable” among the investment properties available to investors, Johnson added.

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