Market indicators Featured

7:00pm EDT January 31, 2007

Today’s real estate market continues to be influenced by a number of outside factors. Rising fuel prices are forcing some employees to look for jobs where the facilities are close to major roads, restaurants and, in some cases, home. Still others look for employment in multiple-use complexes that allow them to run errands without burning a lot of time or gas.

“We pay attention to a variety of factors that impact the real estate marketplace, including a number of macroeconomic factors that everybody in business should pay attention to,” says Keith Pierce, director of research at CB Richard Ellis in Atlanta.

Smart Business talked to Pierce about the different factors affecting today’s real estate market.

What impacts changes in real estate markets?

Nearly everything can potentially impact real estate markets. Interest rates are an obvious choice, but you also have to look at housing starts, retail sales and employment figures. These kinds of issues may not have a direct impact on your real estate expenses as an employer, but they do impact the dynamic of your business as well as the needs of your employees. They certainly impact the needs of your clients and your prospects, and you need to pay attention to these factors as you consider the possibility of growth, consolidation or relocation.

Transportation is certainly another component; whether it’s shipping or trucking or rail, the cost of moving materials has risen.

What other factors affect rent levels?

Some constant factors in the real estate world are the cost of construction as well as absorption, which is the pace at which space is occupied in a market. These things will impact rental rates.

One thing the occupier of a space may not be aware of, but that we watch, is the investment cycle of a building. If owners want to put a building on the market for sale, their stance in terms of rents and occupancies may be different than when they are acting as a long-term holder of that building. Owners may try to fill the building so that it holds a higher value, or they may resist filling the building in hopes that a potential buyer will buy it for the upside potential and plan to fill it at a higher rate. The point is that the relationship you have with landlords is likely to be impacted by their investment strategy.

As an occupier of office space, it’s important to know what’s going on in the office market — specific to your building, in your market and your neighborhood. These factors can impact the cost of space and the relative advantage of relocating. So whether we’re studying the market on behalf of a client or simply tracking it on a regular basis, those are some of the factors we pay attention to.

Is a lot of land still available for development?

Atlanta is not technically a land-restrained market like New York City, where you’re dealing with an island, or San Francisco, where you have mountains and an ocean standing in the pathway of growth. Atlanta has no natural barriers to growth, so it’s able to grow outward in most directions.

Having said that, at this point in the market cycle, the cost of construction creates another kind of barrier. It’s difficult for developers to recoup their investment because the cost of raw materials has gone up during the past several years and has outpaced rent inflation. If you build a building but can’t rent it at a rate that will recoup your costs, then naturally you’d be hesitant to build it.

What about mixed-use projects?

There has been an increase in office space being built as a component of mixed-use projects in this and other markets. These projects work to everyone’s advantage for a couple of reasons.

First, they allow you to spread the risk and cost across different product types that appeal to different audiences, especially if you expect it to take a while for the office space to lease at your desired rate.

Second, employers like locating in these types of projects because employees tend to be happier and more efficient when they can get lunch or pick up a gift or simply run errands within walking distance of their office. And if there’s a residential component to the building, then some people wouldn’t have to go very far at all.

KEITH PIERCE is director of research for the Atlanta office of CB Richard Ellis. Reach him at keith.pierce@cbre.com or (404) 504-7886.