U.S. Office Market Reveals Weak Q1 Performance

MBA (4/21/2008 ) Palaparty, Vijay
U.S. office market vacancies reached 12.77 percent in the first quarter of 2008, according to a report from Colliers International, Boston. The 35 basis point increase is the second consecutive quarter of rising vacancies on a national level.

The pinch was felt more in suburban markets where office vacancies rose to 13.8 percent—39 markets experienced an increase in vacancies while only 14 markets saw a decline. Central business district vacancies remained more stable, but 29 markets reported a spike in vacancies and only 22 markets recorded a decrease.
Class A vacancy rates increased from 11.28 percent in the fourth quarter of 2007 to 11.76 percent last quarter. Class B and Class C vacancy rates also increased to 13.65 percent. Downtown Class A lease rates, averaging $49.84 and $31.08 per square foot (unweighted), increased 2.6 percent from the end of last year. Despite increasing vacancy rates, downtown lease rates increased 15.3 percent from a year ago. Suburban rents, at $28.84 and $26.83 (unweighted) per square foot, reported no change this past quarter but were also up 9.2 percent from a year ago.

“Despite the abundance of bad news experienced by the financial markets in the this quarter, the office real estate market now finds itself in a battle of expectation, said Ross Moore, senior vice president and director of market and economic research at Colliers. “Tenants see a faltering economy and as a result expect lower rents, while landlords feel confident with occupancy rates still near historic highs, giving them the leverage to push rents higher.”

Absorption rates fell from 9.8 million square feet from the fourth quarter of 2007 to negative 3 million square feet in 2008's first quarter. First quarter absorption also measured well below last year, during the same period, when occupied space increased 12.5 million square feet. Regardless, first quarter construction activity added 17.8 million square feet to the office market and an additional 119.5 million square feet is currently under construction. Construction pipelines increased, expecting to build 10.6 million square feet as well.

“While we marked down our Q1 projections, last quarter’s absorption numbers were considerably below the latest revisions,” Moore said. “This suggests the first half of 2008 will be relatively quiet for a lion’s share of U.S. cities.”

Markets witht the highest downtown market vacancy rate, which averages 10.8 percent nationally, are Kansas City, Mo. (21.3 percent), Dallas/Fort Worth (21 percent) St. Louis (19.6 percent), Cleveland (18.6 percent) and Reno, Nev. (18.4 percent).

The cities with the lowest downtown market vacancy rates include Charlotte, N.C. (2 percent), Raleigh/Durham/Chapel Hill, N.C. (5.3 percent), Washington, D.C. (5.4 percent), Bakersfield, Calif., (5.7 percent) and Las Vegas (6 percent).

Among cities that have the highest suburban market vacancy rate, which nationally averages 13.8 percent, Santa Rosa, Calif. (26.4 percent), Cincinnati (19.9 percent), Chicago (19.6 percent), Indianapolis (19.6 percent) and Hartford, Conn. (19.4 percent) topped the list.

The lowest vacancy rate in suburban markets includes can be found in Honolulu (6.8 percent), Bakersfield (7 percent), St. Louis (8.7 percent) Orlando, Fla., and Nashville, Tenn. (9.5 percent).