Two Property Sectors
Continue to Struggle

The values of office buildings and apartment units fell significantly in the first quarter on lower rents and less leasing activity, according to a new survey.

Office-building values dropped 1.8% in the quarter to $132.33 a square foot, from $134.76 in the fourth quarter of 2003, according to a survey of the top 50 U.S. markets by Reis Inc., a New York-based real-estate research firm. Apartment values declined 1.4% to $67,884 a unit from $68,848 in the previous quarter.

Hard-Hit Suburbs

It was the fifth straight quarter of declining values for offices. Despite good news on the jobs front -- a leading indicator of office-market health -- the rate at which companies took up space slowed in the quarter, and effective rents declined by 0.7%, continuing a string of 12 straight quarters of falling rents.

Office buildings that sold in the quarter actually went for an average $165.60 a square foot, a 25% premium over the Reis value, according to the survey, which tracked transactions worth more than $2 million. That disparity is due to a number of factors, including that only a small percentage of buildings change hands in any given three months, says Lloyd Lynford, chief executive of Reis. Also, the buildings selling right now tend to be higher-quality ones that are worth more than the average property.

The effects of the prolonged downturn continue to build for landlords, especially those with suburban office properties, which typically have three- or five-year leases. Leases signed three or four years ago during the height of the market are rolling over, and tenants are able to pay an average 20% less than they were paying on leases signed in early 2001. Leases in downtown-area buildings are generally seven to 10 years in length, so landlords with buildings there are more immune to the rollover effect.

More on the Way

Meantime, the apartment market has been bleak the past several months, decreasing the value of apartments, Mr. Lynford says. Rents were flat in the first quarter at an average $867 a month. The vacancy rate climbed to 7.1% -- the highest since 1987 -- on negative absorption of 17,100 units. Absorption is the net change in the amount of occupied units. To add to the troubles, another 92,000 new units are scheduled to be completed this year.

"New construction is not under control in the multifamily sector," Mr. Lynford says. "That's going to put additional upward pressure on vacancies."

But some say things can only get better in the apartment sector. "On one hand, we definitely have a mad rush for the late-bloomer home buyers trying to catch interest rates" before they go up, says Brian Ward, president and chief executive of Orion Residential LLC, a Seattle-based national investment company backed by Starwood Capital Group Global LLC. But that's offset by strong employment growth in the past few months, which usually results in more apartment rentals, he says. "I would say you're probably looking at the bottom of the market," Mr. Ward says.

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