Ask the Expert from the MCOB Executive Advisory Council – What is the State of the Mobile Commercial Real Estate Market, Particularly the Office Market?
The U.S. office market is composed of approximately 4.1 billion square feet of net rentable area. The three largest markets are Manhattan, Washington D.C., and Chicago. San Francisco, Boston, and Houston are increasing in size and growing in importance because of the diversity of office users locating to these markets. The Central Business Districts (“CBD”) are the areas within these markets where the majority of office rentable square footage is located. The CBD areas contain the highest concentration of financial Institutions, City, State and Federal government activities, and legal communities.
The national office market experienced a sharp decline in occupancies due to the effects of “The Great Recession”. Many communities saw office vacancies increase to 35%-40%, which led many undercapitalized properties to experience foreclosure or distressed sales. The near collapse of financing from Commercial Mortgage Backed Securities (“CMBS”) and the sharp reduction in other traditional sources of commercial lending made refinancing these properties difficult or impossible.
The office market in Mobile is between six million and seven million square feet of net rentable area. This includes all the multi-tenant office properties and owner occupied properties. In comparison to other markets in the State of Alabama, the Mobile office market is small. Montgomery, with a population very similar in size to Mobile, has about 15 million square feet of net rentable area. Birmingham has about 30 million, and Huntsville, with a much smaller population than Mobile, has about 18 million square feet of net rentable square footage.
In 2014 Mobile had over 650,000 square feet of multi-tenant office properties experience foreclosures or distressed sales. This represents about 15% of the total multi-tenant office market. Each of the foreclosed or distressed sale properties had an individual reason for the property to be in its particular financial situation. Some of the issues were due to the form of ownership or were a result of poor management; however, most of the issues were caused by a lack of Capital. The sudden drop in occupancy levels, and the corresponding reduction in cash flows, amplified and accelerated the already declining financial situations of these properties. The lack of invested capital, and the reduced sources of outside capital, forced the properties into foreclosure or sale. The number of Mobile office market properties that have recently experienced foreclosure or distressed sales is unprecedented.
Chaos brings pain, but also creates opportunity. In Mobile the majority of the stressed properties have changed ownership, the new owners have committed capital to stabilize and improve the declining properties. New investment in properties that were physically, as well as financially deteriorating, is allowing these properties to be renovated, updated, and relevant to the market place again. Another less noticed, but equally if not more important, result in the change in ownership, is that many properties that were owned by absentee owners have been returned to local ownership. Local owners tend to be more committed, and more involved with the day to day management of the properties. The future focus of the property owners will of course be for profit, but it will also be on appearance, these properties contribution to, and appearance within, the community will take on new and increased importance.
Today, the national office market is consolidating, experiencing increased occupancies, has an increasing variety of willing lending sources, and is attracting new development. The Mobile office market is enjoying the same positive experience.
The last few years were disruptive both nationally and locally. Many properties that had been underperforming, with increasing levels of deferred maintenance, and declining levels of occupancy, are currently becoming successful, relevant and contributing properties. These properties returning to productive use is good for the Mobile office market and presents an optimistic view of the direction that many local investors feel the Mobile commercial real estate market is headed.
Gavin Bender, Sr. President, SIOR
Bender Real Estate Group, Inc
917 Western America Circle
Suite 102
Mobile AL 36609