U.S. Office Sector: Demand For Space Slow But Steady

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Posted by Heidi SchwartzScreen Shot 2013-10-07 at 4.03.20 PM

According to a report from Cassidy Turley, U.S. businesses have continued to fill up vacant office space in the third quarter of 2013, and limited new construction has vacancy rates falling in 70% of the country. Meanwhile, U.S. office markets absorbed 12.8 million square feet (msf) of office space in the third quarter, down from 15.6 msf in the second quarter. Third-quarter vacancy totaled 15.2%, unchanged from the previous quarter. Vacancy is now 2% lower than its recessionary-peak of 17.2%.

“Demand for office space is still subpar, but, nevertheless, it has been consistently positive for multiple, consecutive quarters,” said Kevin Thorpe, chief economist at Cassidy Turley. “At the same time, new supply remains extremely constrained. In fact, demand for office space has now exceeded new supply for over two years. So the office sector is clearly tightening in most cities across the country.”

There was 55.3 msf of office property under construction as the third quarter came to a close, up from 54.5 msf registered in the prior quarter. Development of new office buildings is 30% below pre-recession levels. Average asking rents in the third quarter of 2013 registered at $21.88, up 16¢ from the same period a year ago, and 42 out of the 80 metros tracked registered rent growth.

“It’s still a tenant’s market in most U.S. cities, meaning businesses still have leverage when negotiating for lower rents and attractive concession packages,” Thorpe said. “But because of limited new supply, the pendulum is slowly shifting from a tenant’s market to a landlord’s market. Supply/demand fundamentals suggest the bulk of the country will be pushing office rents upward by this time next year.”

The top 10 strongest markets in terms of demand for office space were Houston, with 1.7 msf of net absorption; New York City, with 1.3 msf; Phoenix, with 822,000 sf; Atlanta, with 740,000 sf; Denver, with 668,000 sf; Chicago, with 659,000 sf; Los Angeles, with 561,000 sf; San Mateo County, CA, with 516,000 sf; Seattle, with 499,000 sf; and Central New Jersey, with 467,000 sf.

The top 10 strongest markets in terms of rent growth were Denver, with 9.0% year-over-year rental appreciation; New York City, with 8.1%; Oakland-East Bay, with 6.3%; Austin, with 6.2%; San Jose, with 6.0%; Los Angeles, with 5.3%; Baltimore, with 5.3%; San Mateo County, CA, with 4.4%; Houston, with 4.3%; and San Francisco, with 3.9%.

Cassidy Turley’s full third quarter office and industrial market reports is available on October 16, 2013.

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