Amidst the general gloom, however, there were signs of spring. Net absorption ended the year barely in the black for the first time since 2000. The inventory of sublease space offered on the market receded slowly through the year thanks to a combination of moderate leasing activity and lease expirations, building on a trend that began in 2002. Property valuation controls The volume of space completions totaled around 25 million square feet, down from 55 million in 2002, while the amount of space under construction retreated slowly through the year as properties that broke ground during rosier times were completed.
In sharp contrast to the office leasing market, the office investment market remained surprisingly firm in 2003, even robust for certain types of assets. This has raised eyebrows among some investors and analysts who fear an asset bubble. Investors have been willing to pay top dollar for leased, Class A office assets with low rollover risk. Demand trails off for properties that fall further down the quality scale. Owners of riskier properties have compensated for reduced rental income by refinancing their mortgages at lower rates, and so 2003 saw few distressed sales or foreclosures.
Furthermore, the next generation of workers will wield more leverage over their terms of employment, and they are likely to trade large offices for more flexible working conditions, making use of technology to spend less time in the office and more time in the field, their clients’ offices or working from home. Corporate real estate executives will jump on the bandwagon, reducing space per employee to a minimum through greater use of hoteling. All of these trends, while not reducing the net amount of occupied space, suggest that it will not expand very fast over the next decade.
Identifying the top metropolitan markets that will deliver superior returns for investors over the coming years can be misleading. Real estate always will be a local business. Properties in slow-growth, low- glamour markets may perform better, depending on their competitive peer group and their management, than properties in fast-growing markets popular with large national and global investors. With that caveat, we have picked Atlanta as the market most likely to perform for investors over the next five years. Frankly, current market conditions are dismal in Atlanta, but local employers are hiring again, creating some 70,000 new jobs over the past 12 months, and Atlanta tops the list in terms of office job creation through 2008.