As a result no one is building on spec anymore, MacIntosh says. "It is all build-to-suit or with significant preleases already in hand."

Washington, DC, though, bucks the national trend as usual, John Kevill of Jones Lang LaSalle Washington Capital Market's team tells GlobleSt.com. "We are seeing positive absorption across the board. Of course, there are some exceptions, probably for the same reasons that they are occurring on a national level: tenants move to new buildings and it takes time to back fill old space."

According to Kevill, in the large DC submarkets vacancies are all dropping. In the CBD, rates have dropped from 8% a year ago to a little more than 5% currently, he says. In the East End, those figures are 8.5% and 7%, respectively.

The government's presence has a lot to do with this of course, especially in some of the Northern Virginia submarkets. Kevill says that there is a wave of leasing activity expected over the next 60 days due to newly won Department of Defense contracts and subcontracts.

Another point in the DC markets' favor: the economy is so strong that vacancies are viewed as an opportunity by investors to capitalize on growth in the area. "Vacancies are, in fact, being very aggressively underwritten," Kevill says.

To a lesser extent this is also true on a national scale. NAR's MacIntosh notes that sales are strong, with investors still interested in both income producing, stabilized properties and the value add or opportunistic plays that a partially vacant building offers.

"Transaction volumes for office were up 32% last year. That trend appears to be continuing this year," he says. What's more, MacIntosh says, pricing is still trending up and cap rates still declining, albeit not as much as in earlier years.

According to NAR, office vacancies are expected to rise to an average of 13.9% by the end of the year from 12.6% in Q4 2006. Net absorption of office space across 56 markets is projected to be 21.9 million sf this year, down from 76.2 million in 2006. Areas with the lowest office vacancies include New York City; Seattle; Honolulu; Orange County, CA; Washington, DC and Miami, averaging vacancy rates of 9.7% or less.

Vacancy rates in the industrial sector are expected to average 10.1% by the end of the year, from 9.4% in Q4 2006. Net absorption of industrial space is estimated at 75.9 million sf in 2007, down from 189.1 million last year. Los Angeles; West Palm Beach, FL; Orange County; Ventura County, CA; Tucson; and Tampa, FL have the lowest levels of vacancies, at 5.7% or less.

Retail vacancies are expected to drop to 8.1% in the fourth quarter of 2007 from 8.2% the preceding quarter. Net absorption of retail space is expected to be 19.9 million sf this year, compared with 8.4 million in 2006. Retail markets with the lowest vacancies include Orange County; San Francisco; San Jose, CA; Las Vegas; Honolulu; and Miami, at 4.4% or less.

In multifamily vacancy rates are expected to remain unchanged from the fourth quarter of 2006, at 5.9%. Northern New Jersey; San Jose; Salt Lake City; Los Angeles; Miami; Washington, DC; and Norfolk, VA, all have vacancy rates of 3.1% or less. Hotel occupancies should average 68.1% in 2007, up from 67.8% last year. RevPAR is projected to be $82.30 this year, up from $78.40 in 2006. Markets with the highest RevPAR are West Palm Beach; New York City; Honolulu; Miami; Fort Lauderdale, FL; and Phoenix, with RevPAR of $125 or more.

Instant Insights /

NAR Reports Office Vacancies On the Rise

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