Bloomberg News

Office Vacancies in U.S. Central Business Districts Decline

July 08, 2011

(Updates with June employment data in fourth paragraph.)

July 8 (Bloomberg) -- Vacancies at office buildings in U.S. central business districts dropped to the lowest level in two years as companies added space for workers being hired, Cushman & Wakefield Inc. said in a report today.

The average vacancy rate fell to 13.9 percent in the second quarter from 14.6 percent in the previous three months and 14.8 percent a year earlier, according to the New York-based broker. The rate last was lower in mid-2009, when it was 13.7 percent.

“It’s a reflection of the pent-up demand in the market,” Maria Sicola, head of Americas research at Cushman, said in a telephone interview. “Economic growth has been slow, but we are growing.”

U.S. employers added 260,000 workers in the second quarter, according to the Labor Department. Payrolls rose by 18,000 in June, the slowest in nine months, showing that the market is still struggling to gain traction. Demand for office space has increased as few new buildings were developed during the recession, contributing to lower vacancies in the second quarter in 71 percent of the metropolitan areas tracked by Cushman.

Since the beginning of 2011, leases for 41.8 million square feet (3.9 million square meters) of office space have been signed, making it the strongest half in 13 years, Cushman said. In the second quarter, 23.6 million square feet were leased, the highest three-month total since the third quarter of 2006.

Manhattan, Chicago and San Francisco all had growth in occupancies in the second quarter. The Midtown and Midtown South submarkets in Manhattan maintained the lowest vacancy rates and highest average rents in the 30 central business districts surveyed by Cushman. Midtown South’s vacancy rate fell to 7.1 percent from 8 percent in the first quarter. Midtown’s rents rose to $63.35 a square foot from $62.63.

Groupon in Chicago

In Chicago, vacancies dropped to 15 percent from 16.4 percent in the first quarter and 16.7 percent a year earlier, Cushman said. Groupon Inc. is among companies adding space in the city, leasing about 50,000 square feet in the East Loop district late last year to accommodate hiring at the Web-coupon provider.

“Things have been improving slowly,” said Jack McKinney, president of J.F. McKinney & Associates, which represented Groupon’s landlord in the deal. “We consider it a tight market if it’s 12 percent, but that ain’t happening for a while.”

Office landlords in San Francisco also have been helped by demand from technology companies. The city’s vacancy rate fell to 11 percent from 11.9 percent in the first quarter, while the average rent increased to $38.95 per square foot from $36.24, the biggest gain among business districts surveyed by Cushman.

Nationally, rents were little changed at $35.86 a square foot.

South of Market

San Francisco’s South of Market area has been particularly popular with tech firms, said Sicola of Cushman.

“There hasn’t been a lot of development -- more retrofitting -- but the demand continues to grow,” she said. “You have an interesting area, which is not your traditional core but that has a lot of amenities.”

No significant construction was finished in U.S. central business districts in the second quarter, with 2011 completions totaling 2.3 million square feet, Cushman said. About 2.1 million square feet of additional office space is expected to be done by the end of the year, with projects under way in Washington, Houston, Miami and Portland, Oregon.

“Leasing activity and declining vacancies have given us a strong indicator in which direction the market is moving,” Sicola said in today’s report. “If activity continues at this pace, 2011 will be on track for a historic year.”

--With assistance from Shobhana Chandra in Washington. Editors: Daniel Taub, Kara Wetzel

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-0- Jul/08/2011 14:57 GMT

To contact the reporter on this story: Ashwin Seshagiri in New York at aseshagiri@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net.


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