The balance of power between tenants and landlords continues to shift towards owners, and the latest report from Property & Portfolio Research documents the extent of this shift. The core finding: In every commercial property type except industrial, and across a slew of disparate markets, the inventory of vacant space fell in the second quarter.

Leasing demand rose across markets as far-flung as Phoenix (apartments) and Honolulu (retail). Only warehouse — which is adding capacity — posted flat vacancy of 8.8% during the quarter, according to the Boston-based consulting and research firm.

The tightening was most pronounced in the apartment and office spheres. Both sectors posted quarterly vacancy declines of 0.2%. Retail vacancy, by comparison, fell by just 0.1% over that period. PPR attributes this meager tightening in retail vacancy to slowing housing sales. The firm also projects that retail vacancy may not drop significantly during the third and fourth quarters, due to the housing slowdown and rising energy prices.

Steepest vacancy drops (during second quarter)
Metro Type 2006Q1 2006Q2
New Orleans office 30.2 29.1
Miami apartment 3.7 2.7
Palm Beach County apartment 4.7 3.7
Nashville warehouse 9.0 8.3
Honolulu retail 4.1 3.4
San Francisco retail 6.0 5.3
Phoenix apartment 7.0 6.3
Washington-N.Va.-MD apartment 6.9 6.2
Salt Lake City apartment 6.2 5.5
East Bay retail 2.7 2.0
Source: PPR


Even so, the apartment market has benefited from the home and condo sale slowdown —with rising interest rates, fewer renters are leaving to become owners. The added combination of strong demand and negative net completions in some markets helped knock apartment vacancy down 100 basis points to 5.8% between midyear 2005 and 2006.

Condo converters were partly responsible for the negative net completions. By siphoning apartment units off the market, converters helped thin the existing inventory of units. In Miami, for example, this conversion activity helped push apartment vacancy down 100 basis points (to 2.7%) during the second quarter. Same story in Palm Beach County, which ended June with just 3.7% of its apartment units vacant.

Markets with largest projected vacancy drops
Metro Type 2006Q1 2006Q2
New Orleans office 29.1 22.5
San Jose office 20.9 18.4
Phoenix apartment 6.3 3.9
East Bay warehouse 7.8 6.1
New Orleans warehouse 7.8 6.1
Boston office 20.3 18.7
Portland retail 6.6 5.2
Raleigh office 15.8 14.4
Raleigh apartment 10.6 9.2
San Jose warehouse 8.9 7.6
Source: PPR


The national office market has benefited from decent job growth and cash-fat companies. During the 12-month period between midyear 2005 and 2006, national office vacancy fell by 90 basis points to hit 16.2%. PPR also expects vacancy to drop by another 50 basis points through midyear 2007. By the way: That’s the highest projected drop for any property segment (apartments are only expected to post a 30 basis point drop over that span, followed by a 10 basis point decline on the retail side) that is tracked by PPR.

Bob Bach, national director of market research at Grubb & Ellis, predicts that market momentum will continue to favor landlords through the end of the year. He also points to solid growth in several formerly downtrodden industrial markets, such as Des Moines and Fresno, as signs of better times ahead in industrial, too.

“The tenants’ market is fast dissolving. This might force some tenants, especially on the office side, to re-evaluate that Class-A lease in midtown Mahattan,” he says, adding that this climate has bolstered secondary office markets (not to mention lesser quality, Class-B properties).