Leasing Figures Failure to Add Up is Only Part of the Problem

Gregory M. Davies
Vice President, Sales and Marketing
CPS CORFAC International

The January 15, 2007 San Jose/Silicon Valley Business Journal article (“Leasing Figures Don’t Add Up”) pointed out the significant differences in 2006 year-end market statistics pu blished by the Silicon Valley’s major commercial real estate companies. Discrepancies between the various firms’ net a bsorption rates – a statistic seen by many as a barometer of the overall direction of the market - are attri buted to varying interpretations of Silicon Valley’s boundaries, differing classifications of space types (R&D, office, etc.), and brokerage companies’ promotion of their proprietary market research data for competitive purposes.

A number of un-mentioned yet equally important factors contri bute to brokerage companies’ differing statistics, including varying methods of recognizing lease transaction dates and for deciding when properties are added to the availa ble inventory. Some companies, for example, count leases as absorption upon execution, while others wait until occupancy occurs and the lease formally commences. Similarly, some companies add su blease space to the available inventory as soon as a brochure is released to the market, while others wait until the sub-landlord is within six months of delivering the space.

As long as these methodological differences exist, and proprietary data remains a competitive advantage, variance in brokerage companies’ market statistics is unavoidable and likely irresolvable.

Rather than focus overtly on the discrepancies themselves, owners and users of commercial property in the Silicon Valley ought to demand that their market research providers employ consistent and transparent methodologies for gathering data, ensuring its accuracy, and preparing their published statistics.

Consider net absorption again. This statistic is accepted as a measure of the overall demand for space in the market during a given period. Some mem bers of the brokerage community calculate net a bsorption by measuring the change in availa ble space during two consecutive periods of time. This is accomplished by simply su btracting the ending inventory in a given period from the beginning inventory in that same period.

There are some significant pro blems with this approach. For one, directly comparing beginning and ending inventories means buildings that have been demolished and/or re-developed for other uses (e.g., housing) will factor into the calculation of net a bsorption. Similarly, if a developer breaks ground on a new building that was not availa ble in the beginning of a given period, and before that period ends is successful in signing a lease with a new tenant, the deal would not factor into net a bsorption using this method.

By comparison, other brokerage companies calculate net a bsorption by measuring the change in occupied space (as opposed to availa ble space) in a given period, resulting in a more accurate reflection of actual demand. Using this approach, additions to the inventory from spec development are not reflected as a decrease in net a bsorption. Similarly, the removal of buildings converted to other uses during a particular period are not counted as an increase in net a bsorption during that period.

The differences between how and when leading local commercial brokers record completed deals, classify buildings, define the Silicon Valley, and calculate net absorption are all legitimate points of discussion. However, the variances themselves – regardless of their magnitude – ought not to justify a blanket discount of all firms’ market research. Instead, these differences should serve as a reminder to users of brokerage industry data that they must carefully evaluate their providers’ methodologies, confirm that they are employed consistently over time, and require that changes be applied retroactively to historical data.

Gregory M. Davies is vice president of sales & marketing at CPS CORFAC International, a Santa Clara-based commercial real estate brokerage that specializes in project leasing, tenant representation and investment sales.