Second Quarter U.S. Office Market Vacancies Increase

MBA (7/18/2008 ) Palaparty, Vijay
U.S. office market vacancies increased for the third consecutive quarter, rising by 27 basis points to 13.24 percent, according to the second quarter office report from Colliers International, Boston.
The report said the slowdown coincides with the sluggish national economy and increasing job losses, especially in the housing and financial services sector. Class A vacancy rates increased to 12.69 percent from 12.19 percent. Class B and Class C vacancy rates increased to 13.71 percent from 13.63 percent.

“Amid the spate of financial sector woes experienced in the U.S. during the first two quarters, the office market has capitulated as we reach the midpoint of the year,” said Ross Moore, executive vice president and director of market and economic research at Colliers. “Tenants have taken a ‘wait-and-see’ attitude, and landlords have stepped up their efforts to fill vacant space as the nation’s economic slowdown shows few signs of abating in the near term.”

Thirty-three central business districts experienced an increase in vacancy while 18 districts experienced a decline. Among suburban markets, vacancy rates in 38 markets increased and 16 markets declined.

Rate of absorption—the change in occupied space—continued on a downward slope in the second quarter, reaching negative 1.4 million square feet. Furthermore, 19.4 million square feet of supply—of which 85 percent is in the suburbs—was added between April and June—similar to amount of supply added during the first quarter.

Class A lease rates held steady while suburban rents decreased 3.7 percent. However, year-over-year, downtown lease rates increased 7.6 percent and suburban rents increased 2 percent. Average downtown rents for Class A space averaged $49.40 per square foot. Suburban office space averaged $27.72 per square foot.

The report said markets experiencing pronounced weakness include Manhattan, suburban Los Angeles, suburban Las Vegas, Orange County, Calif., and suburban San Jose. Tentative signs of weakness were reported in suburban Atlanta, suburban Chicago and suburban Orlando.

Markets with healthy office demand include suburban Dallas and suburban Houston. Measured growth was also found in suburban Boston and suburban Kansas City.