Capital markets: a light at the end of the tunnel.

Although the pace of office space recovery varies widely across the country, the numbers confirm that a recovery has indeed begun, according to Ray Torto, a principal of Torto Wheaton Research, the market research arm of CB Commercial Real Estate Group, Inc.

Torto and Glenn Whitmore, managing director of CB Commercial's Investment Properties Group, were the keynote speakers of a breakfast symposium on trends in commercial real estate held on May 12 in Manhattan.

Plain Vanilla Recovery

Torto predicts that national vacancy rates will fall to 11-12 percent by the year 1998 if there is no new construction. Real rents are expected to rebound from 1993 levels in the second half of 1994 and will rise steadily over the course of the next few years. This recovery will be due to rising absorption of existing office space, falling vacancy rates and lack of tenant choice for new leasing options.

Torto expects Manhattan's current vacancy rate of 15.2 percent to drop to 14.5 percent by the end of 1994 and to a low of 11 percent by 1998. Rent levels -- which hit bottom in 1993 -- are expected to rise steadily throughout the remainder of 1994 and into 1995.

"The office space recovery is 'plain vanilla' as compared to the recovery of the 1980s, but it certainly foretells better days ahead -- both for Manhattan and the entire U.S.," said Torto.

For the first time since the numbers have been recorded, suburban office vacancy rates are lower than downtown rates. By the end of the first quarter 1994, suburban vacancy rates averaged 16.7 percent, down from 24 percent seven years ago. Within the same time frame, downtown rates have steadily risen, from 12 percent in 1986 to a peak of 17.6 percent in 1992 and 16.9 percent in 1994.

Net absorption figures were at their best levels in three years for suburban markets (averaging 38 million square feet) and four years for downtown markets (averaging 12 million square feet). According to Torto, "It's not the late 1980s, but it's better."

Light at the End of the Tunnel For Capital Markets

"We are beginning to see a light at the end of the tunnel in terms of capital markets in real estate, and for the first time it's not a train that's going to run us over," said Glenn Whitmore, managing director of CB Commercial's Investment Properties Group.

Whitmore, who led a discussion on capital market trends at the symposium, predicted some of the "hot" markets for the remainder of 1994 will be: retail power centers (e.g., department stores, high credit strips); bulk warehouse facilities; and suburban office markets.

Whitmore predicts that dominant regional malls will be the "hot" retail property to watch for in the coming months. In industrial space, "look out for contract warehousing facilities."

"Institutional investors, in making prudent investment decisions, should keep in mind that with the influx of home shopping networks, mega-warehousing and virtual offices/hoteling," Whitmore said. "Traditional office and industrial space will be changing over the next few years."