Markets such as Austin, Texas; Denver; San Jose, Calif.; and Seattle, as well as coastal markets, showed surprising year-over-year gains in the rankings by Marcus & Millichap Real Estate Investment Brokerage Co., based in Encino, Calif. The firm's research division ranks markets based on a series of 12-month, forward-looking supply and demand indicators. Markets are ranked based on their cumulative weighted-average scores for things such as forecast employment and rent growth, vacancy, construction and additional space occupied, with the most weight given to job growth and vacancy. They are ranked relative to their positions in the prior year. The rankings are intended to be used as an investor's guide to office-building markets.
Based on strong expectations on all those measures, Fort Lauderdale, Fla., rose 10 spots — one of the biggest year-over-year moves — to top the 2005 ranking, displacing Washington, D.C., which fell to No. 2. Other coastal markets that moved up in the rankings include Miami, which rose seven spots to seventh place, and West Palm Beach, Fla., which rose two spots to 10th place. The other top-10 ranked markets included Orange County, Calif.; Riverside-San Bernardino, Calif.; Manhattan; San Diego; Tampa, Fla.; and Los Angeles. There were no significant shifts in those already strong markets.
The markets that had stronger-than-expected moves in the rankings were some of those hurt the most during the economic downturn, largely at the hands of the technology bust. Vacancy rates rose and rents fell in those markets.
Seattle had the biggest jump, moving 20 spaces to 15th place. The city had higher-than-anticipated job growth of 2.1 percent in 2004 and better-than-expected leasing of additional space, which bodes well for 2005.
Denver moved up six spots to 24th place, as defense contractors expanded employment. What's more, there hasn't been a large amount of commercial construction in Denver in recent. With supply tight and employment growing, office buildings should become more attractive to investors.
As in many of these recently beaten-down markets, investors have bid up the price of buildings in anticipation of a rebound. In Denver, there has already been a 50 percent increase in office-building transactions in the past 12 months, which has resulted in escalation of pricing.
The markets at the bottom of this year's ranking, including Milwaukee, Cincinnati and Columbus, Ohio, continue to be challenged by below-average economic outlooks, Marcus & Millichap said.
