City of Noblesville Unified Development Ordinance Audit. Real Estate Analysis

Transcription

1 City of Noblesville Unified Development Ordinance Audit Real Estate Analysis December 10 th, 2012

2 Introduction The Noblesville Real Estate Analysis compares the health of the real estate market against comparable communities in the areas of commercial office space (classes A, B, and C) and industrial space (industrial research and development as well as flex space). A Real Estate Analysis is a study that compares the economic health of a segment of the local economy as compared to comparable communities, regional trends, and national trends. This process is similar to the process that is used when evaluating a new home for purchase. The individual property (local market) is compared to those within the local neighborhood (regional market) and also the surrounding neighborhoods (national market) as well. These comparisons help to identify if the asking price is appropriate and also help to identify if there are local trends that may justify higher or lower rates. These comparisons also show the available stock within the regional and national markets to determine if there is a surplus or a lack of supply. Markets The Real Estate Analysis examined seven different markets. These different markets were selected to help identify and compare national, regional, and local market conditions. All analysis provided in this report has been conducted at the submarket level. This means that Noblesville has been studied as a part of the Indianapolis North Carmel submarket as this is the smallest subarea of economic data that still retains statistical integrity for analysis. The submarkets used in this study are: National Midwest Indianapolis North Carmel (Noblesville) Minneapolis Southwest (Eden Prairie) Chicago Southwest (Oak Lawn) Chicago West (Naperville) Austin Round Rock (Cedar Park) Figure 1: Market Locations Eden Prairie Naperville Oak Lawn Carmel Noblesville Round Rock 2 RW Armstrong

3 The national and Midwest subareas were only used for the office analysis as industrial facilities tend to remain within set geographies that makes tracking regional and national trends less important. National The national market encompasses the continental United States. The performance of the US economy in the second quarter is best described by Cushman & Wakefield: The US economy continued to expand during the first half of 2012 driven by consumption, investment and exports. Real US Gross Domestic Product rose at a 1.5% annualized rate in the second quarter. This helped employment grow 1.3% year-over-year (for a net gain of more than 1.7 million new jobs through June) and pushed unemployment down 0.9 percentage points to 8.2%. While momentum remained positive, the rate of overall improvement appeared to be slowing as second quarter came to a close and will likely stay below trend for several more quarters. Cushman & Wakefield Marketbeat Office Snapshot, Q Midwest The US is broken into five different analysis regions for the REIS real estate market reports. For this report, the Midwest region has been studied. The Midwest region includes Ohio, Indiana, Michigan, Illinois, Wisconsin, Minnesota, Iowa, Missouri, North Dakota, South Dakota, Nebraska, and Kansas. Figure 2: Midwest Region Office & Industrial (Provided by REIS) 3 RW Armstrong

4 Indianapolis North Carmel (Noblesville) The Indianapolis North Carmel Subarea for office uses, identified as number six on the following map, includes all of Hamilton County as well as the Meridian Street corridor in Marion County from 96 th Street to North Street in Marion County/Indianapolis. The Indianapolis North Carmel Subarea for industrial (research and development/flex space), identified as number nine on the following map, only includes Hamilton County and does not include the segment that extends into Marion County/Indianapolis. The performance of the Indianapolis area market is summarized by Cushman & Wakefield as: While Indiana s unemployment rate has remained mostly stagnant over the last two reported months, May s rate of 7.9% remains slightly below the US unemployment of 8.2%. Indiana continues to attract businesses from across the country, and in recent CNBC ratings of the country s top state for business, Indiana s legal and regulatory framework earned it a top five ranking in business friendliness. The state s consistent AAA credit rating and surplus operating budget continue to put it at the top of corporate site selection lists. Cushman & Wakefield Marketbeat Industrial Snapshot, Q Figure 3: Indianapolis Metro Area Map Commercial (Provided by REIS) 4 RW Armstrong

5 Figure 4: Indianapolis Metro Area Map Industrial (Provided by REIS) Minneapolis Southwest (Eden Prairie) The Minneapolis Southwest Subarea is a part of the Minneapolis/St. Paul metropolitan area. As shown in the following maps, the commercial subarea is smaller than the industrial area and is located closer to the center of Minneapolis and St. Paul. The health of this market is summarized by Cushman & Wakefield as: In the month of May, the state s unemployment rate stood at 5.6%, well below the national rate of 8.2%. The 22, 600 increase in jobs year-over-year is up 0.8% from one year ago. The Professional and Business sector lost 1,600 jobs, a 0.5% change from one year ago, while Financial Activities lost 400 jobs, marking a 0.2% decrease. The Manufacturing sector has gained 0.3% jobs compared to one year ago, while Transportation, Warehouse, & Utilities had a very slight gain with 200 jobs. Cushman & Wakefield Marketbeat Office & Industrial Snapshots, Q RW Armstrong

6 Figure 5: Minneapolis Southwest Subarea Map Commercial (Provided by REIS) Figure 6: Minneapolis Southwest Subarea Map Industrial (Provided by REIS) 6 RW Armstrong

7 Chicago Southwest (Oak Lawn) Two municipalities included in this report, Oak Lawn and Naperville, are located within the Chicago Metropolitan area. Because of this, the Chicago Southwest Subarea has been included for Oak Lawn and the Chicago West Subarea has been included for Naperville. According to a recent report by World Business Chicago, the Chicago area economy added jobs in nearly every sector from March to April this year. The combined sectors of construction, manufacturing, wholesale trade, retail trade and transportation and utilities (the sectors most likely to impact industrial activity) added a total of 21,700 jobs during that time frame. Currently, the Chicago metropolitan area unemployment rate stands at 8.5%, a slight decline from the 8.8% reported mid-year This recent boost in Chicago-area employment bodes well for further industrial market recovery. The area s superior transportation infrastructure continues to be a draw for companies to relocate to the area, as evidenced by the recent construction surge at area intermodal centers. This manifests Chicago s position as the third largest intermodal center in the world. According to the Bureau of Labor Statistics, 41,600 jobs were added to the Chicago-Joliet- Naperville Metropolitan Statistical Area over the past year. In addition, the unemployment rate dropped 0.5 percentage points to 8.9%. These local economy improvements are gradually improving the outlook for Chicago s suburban office real estate market. Cushman & Wakefield Marketbeat Office & Industrial Snapshots, Q Figure 7: Chicago Southwest Subarea Map Commercial (Provided by REIS) 7 RW Armstrong

8 Figure 8: Chicago Southwest Subarea Map Industrial (Provided by REIS) 8 RW Armstrong

9 Chicago West (Naperville) Figure 9: Chicago West Subarea Map Commercial (Provided by REIS) Figure 10: Chicago West Subarea Map Industrial (Provided by REIS) 9 RW Armstrong

10 Austin Round Rock (Cedar Park) Cedar Park, Texas is located northeast of Austin, Texas in the Round Rock Subarea. The Austin market is currently strong, as identified by Cushman & Wakefield: Throughout the first half of 2012 Austin continues to be a leader amidst the majority of the nation in many aspects, one of them being job growth. According to the Texas Workforce Commission Austin added 22,700 jobs since May of last Year. Among major metros in the nation, Austin ranks sixth in Job creation. According to the Business Journal, a nationwide periodical, Austin has ranked the number one city for small businesses to grow within the nation. Many companies are beginning to migrate to the Austin market in aims to be part of this positive economic surge. According to the U.S. Bureau of Labor Statistics the unemployment rate in Austin is at 6.1%, down 0.6 percentage points from where it stood in May of 2011 at 6.7%. Austin continues to remain lower than the state and national rates of 6.9% and 8.2%. Cushman & Wakefield Marketbeat Office Snapshot, Q Figure 11: Round Rock Subarea Map Commercial (Provided by REIS) 10 RW Armstrong

11 Figure 12: Round Rock Subarea Map Industrial (Provided by REIS) Data Sources Time Period The most recent economic data available at the time of this report was for the second quarter of All of the data used within this report is from this time period. Providers Data for this report was collected from REIS, Inc., Colliers International, and Cushman & Wakefield. This data was then consolidated, aggregated, and analyzed by RW Armstrong to reflect the current economic conditions of the comparable communities. This data was then used to provide comparisons between Noblesville s economy and the selected communities. Methodology Identify Target Markets The target markets used for this analysis are the same markets used for the Target Industry Analysis and the Laborshed Analysis. The communities were chosen as they have similar socioeconomic factors that would make the communities attractive to similar companies. The consistency between reports is important so the results of each report can be compared and contrasted using consistent base data. 11 RW Armstrong

12 Obtain Data The primary source for data used in this analysis is REIS, Inc. This data provides detailed statistics for trends in rental rates, vacancy rates, building inventory, absorption, and employment. The REIS data serves as the basis for the analysis, and is supplemented by information from Colliers International as well as Cushman & Wakefield. Cushman & Wakefield provided information about larger market trends that helped to better understand the REIS data. Colliers data helped to verify the REIS data, but was not used as the primary source as the subareas used for Colliers analysis do not necessarily reflect local municipal boundaries, which REIS data does. Refine Data Using the REIS data as a base, detailed spreadsheets were developed for office and industrial space. Office uses were split between Class A space and Class B and C space. Class A space is typically the new, modern, up-to-date space while Class B and C space may be older with fewer amenities. For the purposes of this analysis, Class B and C office space were grouped together as discerning between the two types could lead to errors in interpreting the data. Industrial space was evaluated as research and development/flex space as more reliable data was available for this classification. This classification of industrial space is also a desired market that is more reflective of the modern economy, which makes it important to study separately from the typical industrial facilities. Analyze Data Once the data was refined and sorted, RW Armstrong analyzed the data to determine the changes that had occurred within each market. These changes were then compared between the municipalities to see where there may be strengths and/or weaknesses. Results The resulting economic data used in this report focuses on four key aspects of the rental market. Available space The amount, in square feet, of a certain type of leasable space available within a market. This includes space that is currently leased as well as vacant space. This determines the overall quantity of space available. Vacancy Rates The percentage of the available space that is currently not under lease. This rate helps to determine if a market has too little or too much available space. Rental Rates The amount paid per square foot of leasable space. This figure helps to determine if the rental rates are too high, too low, or in line with surrounding areas. Net Absorption 12 RW Armstrong

13 The rate that the vacant space is gaining occupants. This is the net amount of space that has been absorbed into the economy by going from vacant space to space leased by a tenant. This figure helps to show how fast the available space is gaining tenants and also helps to show when more space may be needed. Commercial Office Commercial office refers to the class A, B, and C office space available within each economy. Class A office is typically the high-end professional space that houses banks, accountants, lawyers, and other large firms. Available Space In the Indianapolis North Carmel Submarket, there is approximately 8,932,000 square feet of leasable office space. Of this, 34.8 percent is Class A space. This proportion of Class A space is roughly proportionate to Austin (Cedar Park) with 34.1 percent, but is disproportionate to both Minneapolis (Eden Prairie) and Chicago (Naperville) as shown in the graph below. Though the amount of Class A space is not proportional to two of these communities, those communities are part of subareas that include some of the largest metropolitan areas in the Midwest region. In terms of geography and proximity to other major cities, Austin (Cedar Park) is more like Noblesville in this aspect, which shows that Noblesville s Class A to Class B and C ratio is appropriate. Figure 13: Available Office Space Leasable Space (Square Feet) 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000, ,110,000 5,822,000 Indianapolis North - Carmel (Noblesville) 12,341,000 8,013,000 27,859,000 11,458,000 Minneapolis SW (Eden Chicago W (Naperville) Prairie) 3,892,000 7,504,000 Austin Roundrock (Cedar Park) Class B/C Class A 13 RW Armstrong

14 Vacancy Rate Target vacancy rates for office developments range from five to ten percent according to Cassidy Turley, Jeffery Weil, and CBRE, Inc. However, the recent economic downturn since 2009 has caused these rates to be higher across nearly all commercial properties. As the following chart shows, the Indianapolis North Carmel Subarea has a lower vacancy rate for Class A space than the overall rate. This is different than the US and Midwest averages, which shows strength within Class A in the local market. This chart also shows that the Indianapolis North Carmel Subarea has a vacancy rate of over 20 percent, which is five percent higher than the US and Midwest averages and is the second highest of all of the communities studied. This indicates that there may have been speculative construction of office space that has outpaced demand or that the subarea is losing tenants. However, if you reference this data against the net absorption for office space, it shows there is some growth in the local market though the supply is still above the demand. Figure 14: Office Vacancy Rates Vacancy (Percent) US Midwest Indianapolis North - Carmel (Noblesville) Minneapolis SW (Eden Prairie) N/A Chicago SW (Oak Lawn) Chicago W (Naperville) Austin Roundrock (Cedar Park) Overall Vacancy Rate Vacancy Rate Class A 14 RW Armstrong

15 Rental Rate As shown in the following chart, the Indianapolis North Carmel Subarea has the lowest rental rates per square foot of any of the areas studied. This can be a competitive advantage of the local market. However, low rates can also be tied to increased vacancy as property owners try to fill space. As the amount of available space becomes more in line with the averages of the other communities, regional, and national averages, then the rates should increase slightly to reflect demand. In the short term, the low rates are a suitable means of attracting new investment and companies. Figure 15: Office Rental Rates Cost Per Square Foot $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 $32.06 $28.06 $23.65 $20.28 $19.63 $18.07 US Midwest Indianapolis North - Carmel (Noblesville) $27.28 $23.61 Minneapolis SW (Eden Prairie) $18.39 N/A Chicago SW (Oak Lawn) $27.32 $27.89 $25.42 $22.82 Chicago W (Naperville) Austin Roundrock (Cedar Park) Average Gross Rental Rate Rental Rate Class A Net Absorption The net absorption helps to identify if the market is growing or shrinking. If there is positive net absorption, then the industry in taking in more space. If there is negative net absorption, then the industry is losing this type of occupant. The chart below shows net absorption for the second quarter of The actual rates would be higher for a yearly absorption rate. In the past quarter, the Indianapolis North Carmel Subarea has absorbed 0.4 percent of the available Class B and C office space and 0.1 percent of the available Class A office space. Given this rate of growth, the local market would take approximately 13 years to absorb all of the available office space. However, these figures can be misleading as one major tenant could absorb the majority of the available space and the analysis was conducted during a period that was influenced by a significant recession. The actual absorption rate will vary and the local market should be able to absorb this space more quickly than the statistics would imply. This information should also not discourage reinvestment in vacant properties as properties that are not cared for will be even more difficult to lease. 15 RW Armstrong

16 Figure 16: Office Net Absorption (Percent of Total Office Space) -0.5 Austin Roundrock (Cedar Park) Chicago W (Naperville) Chicago SW (Oak Lawn) N/A 0.3 Minneapolis SW (Eden Prairie) Indianapolis North - Carmel (Noblesville) Indianapolis Midwest US Overall Net Absorption Class A % Overall Net Absorption % Commercial Summary Overall, the Indianapolis North Carmel Subarea has excess capacity for the office market. As was noted within the previous sections, the rental rate is tied both the local market and to the availability of space. These figures, however, can change dramatically through the addition or subtraction of one major tenant. Industrial For this analysis, industrial space is represented by research and development as well as flex space. Available Space The Indianapolis North Carmel Subarea has the least amount of industrial space out of all of the communities studied with just over 1.6 million square feet. These buildings require large footprints and often require large amounts of outdoor space for transferring and storing goods. These structures can range from tens of thousands to hundreds of thousands of square feet for each tenant. Growth in this segment is important as the Target Industry Analysis identified that there are industrial prospects to be pursued as emerging markets. 16 RW Armstrong

17 Figure 17: Available Industrial Space 35,000,000 32,584,000 Leasable Space (Square Feet) 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000, ,026,063 1,640,289 8,663,000 6,917,000 5,861,000 Vacancy Rate According to Cassidy Turley, the target vacancy rate for industrial properties is ten percent. As shown by the following chart, the vacancy rate in the Indianapolis North Carmel Subarea is at this threshold. Given the size requirements of industrial uses, these numbers can fluctuate rather abruptly. The Indianapolis North Carmel Subarea has a slightly higher (0.5 percent) vacancy rate than Indianapolis as a whole, but is dramatically lower than the vacancy rates of the other communities studied. This shows strength in the Indianapolis market, but a lack of overall demand in the market as a whole. The trend of Indianapolis having less industrial vacancies suggests a competitive advantage that Noblesville could use as an opportunity. 17 RW Armstrong

18 Figure 18: Industrial Vacancy Rates Square Feet Vacant 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , ,989, ,556 4,477, ,433, ,231, , Percent Vacant Vacant Stock Vacancy Rate Rental Rate The rental rate for industrial space in the Indianapolis North Carmel Subarea is in keeping with the comparable communities. Comparison between the rental rates and the vacancy rates identifies some trends among these communities. Austin s rental rate is artificially low as there is an ample supply of vacant property on the market that is pushing down prices. Conversely, the rates in Indianapolis are higher than the rest as there is not as much vacant space available, which is aiding in increased prices. The rates can also be reflective of the kind of tenants in the space as higher tech firms require more advanced structures and furnishings, which increases the rental rate. Therefore, Austin is oversupplied and Indianapolis is undersupplied. 18 RW Armstrong

19 Figure 19: Industrial Rental Rates Cost Per Square Foot $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $8.00 $7.11 $5.53 $7.44 $7.25 $7.74 $1.00 $0.00 Net Absorption The Indianapolis North Carmel Subarea has an average rate of absorption among the communities studied in this report at 0.9 percent. At the current rate of absorption, the Indianapolis North Carmel Subarea will absorb all of the available, vacant industrial space in two to three years. This signifies a need to construct more of these facilities to keep pace with demand. 19 RW Armstrong

20 Figure 20: Industrial Net Absorption (Percent of Total Office Space) South Chicago (Oak Lawn) 2.5 Southwest-Scott Cty (Eden Prairie) -0.4 Dupage County (Naperville) 0.7 Austin Metro (Cedar Park) 1.3 Indianapolis North (Noblesville) 0.9 Indianapolis Industrial Summary The Indianapolis North Carmel Subarea is on the verge of a shortage of industrial space. The relatively high rental rates, relatively low vacancy rate, and average rate of net absorption signify that the need for more industrial space within the Indianapolis metro area. 20 RW Armstrong