Bloomberg News

Office Vacancies Decline in U.S. as Economy Recovers Slowly

January 08, 2012

(Updates with comment from Cushman & Wakefield data starting in 10th paragraph.)

Jan. 6 (Bloomberg) -- U.S. office vacancies fell in the three months through December, extending a yearlong recovery, as a dearth of new supply helped counter sluggish economic growth, Reis Inc. said in a report today.

The vacancy rate dropped to 17.3 percent from 17.6 percent a year earlier and 17.4 percent in the third quarter, the New York-based property research firm said. The fourth-quarter rate was the lowest since the end of 2009, according to Reis.

“After four quarters of squeezing out gains in occupancy, the office sector has assuredly turned the corner and begun the process of recovery,” Victor Calanog, head of research and economics at Reis, said in the report. “Still, given the severity of the last downturn and the lackluster pace of economic growth, it will be years before the office sector climbs out of the hole.”

Hiring by technology companies and the energy industry helped offset cutbacks in government and financial services, shrinking office vacancies during the past year. The sluggish pace of job creation will continue to temper demand for office space, according to Reis.

“Five-year leases that are coming up for renewal in 2012 have a high likelihood of being signed at lower rates, implying a dilution in landlord incomes,” Calanog said in the report.

Office landlords had a net gain in occupancy of 5.25 million square feet (487,700 square meters) in the fourth quarter, leading to a net increase of 20.7 million square feet for the year. That compares with a net loss of 16.7 million square feet in 2010, Reis said.

Lack of Supply

About 2.43 million square feet of new office space was completed in the fourth quarter, bringing the 2011 total to 12.3 million square feet, the smallest annual space increase in 15 years, according to the report.

The lack of new supply has helped buoy leasing fees, Calanog said. The average effective rent, or what tenants paid after landlord concessions, rose to $22.53 a square foot in the fourth quarter from $22.10 a year earlier and $22.41 in the previous three months, Reis said.

Washington and New York had the lowest office vacancy rates in the fourth quarter, at 9.4 percent and 10.5 percent, while San Francisco and New York had the biggest increases in effective rents from a year earlier.

Cushman Report

Office leasing was particularly strong in U.S. central business districts, according to a separate report from Cushman & Wakefield Inc. New leases in the 30 districts tracked by the brokerage firm totaled 76.5 million square feet in 2011, up 17 percent from 2010 and the most since 2007. Chicago, Southern California’s Orange County and downtown Manhattan had the biggest increases in leasing volume, according to Cushman.

“There is still some apprehension, but tenants are saying we’re really at the bottom,” Maria Sicola, Cushman’s executive managing director for Americas research, said in a telephone interview from San Francisco. On average, tenants leased less space last year than they did in 2010, she said.

The U.S. office market is rebounding from a loss in occupied space of 137 million square feet -- more than the inventory of office buildings in Boston -- from 2008 to 2010, Calanog said in the Reis report.

Even as the market bottomed, tenants hesitated to take advantage of lower rents by signing long-term leases because of pessimism about the economy, said Dan Ivanoff, managing investment partner of Schnitzer West LLC, a Seattle-based developer of commercial real estate.

‘Concerned About Survival’

“Tenants were not taking long positions on space when rent was really cheap,” Ivanoff said. “Their upper leadership was more concerned about survival, so that’s been very interesting to watch. We are now seeing incremental expansion of demand but it still looks to be cautious so far.”

Leasing in central business districts will probably rise further this year, led by strong demand from industries such as technology, according to Sicola of Cushman & Wakefield. “There’s no sign of a slowdown in tech,” she said.

Washington, where leasing weakened in the second half, is likely to be slow through 2013 because of cutbacks in federal spending, she said.

--Editors: Christine Maurus, Daniel Taub

To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net

To contact the editor responsible for this story: Daniel Taub at dtaub@bloomberg.net


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