Forecasting office vacancy - what would you do given this data?

[Michael Anuzis]

Considering acquisition of a class B office in Michigan. This would be my largest investment so I'm trying to be conservative in my models. The office is currently 5% vacant, but 25% vacant as recent as 3 months ago. I'm looking to make an offer based on a forecast of its average expected vacancy over a 10-15 year hold.  A prior thread on BiggerPockets suggested using a 20% vacancy rate for offices due to their volatility, but I'm having a hard time making that case to the broker based on the market data available. Sharing the data below and appreciate any advice on how you would forecast vacancy.

For reference: I plan to acquire for cash flow and maintain as needed; no active development.

Q3'16 Metro-Detroit Data; source: CBRE

Sub-Market data specific to the building in question (classes A,B,C); source: listing broker

(shows 8% vacancy)

Historic Vacancy & Forecast specific to the building's submarket; source: listing broker

I requested historic data dating back to 2005 to observe how vacancy was effected by the last recession, but historic data was only available to 2012. (chart shows: 15% vacancy in 2012, down to 8% currently)

I inquired how the aboveforecast was modeled, but no explanation was available. Can't say I trust it.

Unemployment: currently the lowest it's been since 2007.

Given: the property has 10 units and short leases expiring in 2017-2018. 3 tenants moved in 2016 (30%).  60% of tenants moved in since 2010. 80% of tenants moved in since 2005. For simplicity, assume all units are equal size, niceness, and cost.

Before receiving any data on the submarket (shared above), I initially used a 25% vacancy based on:

• 19.9% (20%) class B vacancy across Metro-Detroit currently
• increase 5% (to 25%) because unemployment is currently near record lows

I further expect unemployment to gradually trend up over 10-15 years due to automation & A.I.

25% vacancy won't fly with the broker or seller given the submarket data available, however, the submarket isn't the nicest of areas and isn't exactly up-and-coming. It sits 2-3 miles away from nice areas, and 2-3 miles away from un-nice areas.

Question: what vacancy would you find fair in making your offer?

Appreciate any advice.