The tide may be turning in both the industrial and office real estate sectors, with supply outpacing demand and construction either slowing or needing to slow. This according to Comparative Statistics of Industrial and Office Real Estate Markets for 2000, published this week by the Society of Industrial and Office Realtors and Landauer Real Estate Counselors.

While generally optimistic, the report clearly stands as a warning to those further developing new office space in an already slowing marketplace. The report is chock-full of comparative data that shows 1999 as an inflection point for the cyclical real estate market in both office and industrial. Despite unprecedented market demand, the report states that, for the first time in a decade, office construction in 1999 showed "unmistakable signs" of overbuilding.

"The office market has been boiling," said SIOR chairman Richard Stanland. "While some of the nation’s largest, densest downtown markets can sustain their current pace of activity and development, others should be watched."

On both the East and West Coast, offices are selling for more than $200 per square foot. In high-demand metropolises like San Francisco and New York City, sellers are racking up more than $300 per square foot.

In addition, vacancy rates for office space have dropped from near 20 percent in 1990 to single digits, resulting in increased occupancy of more than 350 million square feet since 1995.

Stanland said high-profile, robust office markets include San Francisco, New York, Boston and Washington, DC/Northern Virginia. In these areas, low vacancies will lead to continually rising purchase prices. But markets to watch, which have high levels of both vacancy and new construction, include Atlanta, Dallas, San Antonio, Ft. Worth, Greensboro, Pittsburgh and Tulsa.

Signs of erosion in the office market were particularly visible in suburban markets, where three times more development is rising than in downtown urban cores. Unless a quick adjustment in the pace of development occurs, akin to the shift that took place in industrial real estate markets in 1999, the national office market could move back into double-digit vacancies in the early 2000s, according to the study.

On the flip side, new building slowed dramatically in the industrial market in 1999 as demand for new space saw signs of evaporation.

"Industrial space users and owners enter the new decade with supply and demand in very sound balance," said SIOR chairman-elect Stephen Blau. National statistics show industrial properties emerging from 1999 with vacancy and absorption levels nearly comparable to 1998 and construction noticeably easing, Blau added.

"Unlike other sectors of commercial real estate, industrial properties are one instance where the ‘dot.com’ businesses are clearly a source of increased real estate demand," Blau said.

"Not only are the Internet companies recycling older industrial buildings for their office functions such as design, programming and marketing, but they are taking large chunks of warehouse space for order-fulfillment operations," Blau said. "The one risk that few have focused on is what happens when consolidation strikes cyberspace, as it will certainly do, and it becomes apparent how short is the path from S-11 to Chapter 11. But for now, this does not pose an immediate threat to industrial markets."

The vacancy rate for industrial property as of September was 6.6 percent, steady compared to the year earlier 6.7 percent. Vacancies in central business districts were as high as 7.4 percent, while areas outside the urban centers registered availability of just 6.6 percent.

According to the study, the general good health of the industrial sector is illustrated by four of the 10 slackest markets showing vacancy in the sub-teen range of 10 percent to 15 percent. Only two markets, Lansing and Charleston, showed significant distress at 20 percent vacancy.