PALO ALTO, CA-The office market showed a surprisingly strong performance in the Third Quarter of the year, despite persistent problems with high unemployment and general economic uncertainty, according to the quarterly Office Outlook from Marcus & Millichap.

Following two quarters of negative absorption, office tenants absorbed 6.6 million square feet nationally, the first upward movement since the first quarter, when leasing activity outpaced vacancy by 7.3 million square feet.

With leasing activity outpacing construction completions by two to one, the national vacancy rate of 17.4% seems poised to fall further, although that rate is only 10 basis points lower than the previous quarter, says the report.

Robust buying activity was another positive sign for the office sector: Investors took down 19.4 million square feet in the Third Quarter, compared to 16.2 million square feet of multifamily buildings, the second most popular real estate vehicle.

On a more sober note, vacancy rates in the Third Quarter fell only 20 basis points nationally, while asking rent gained a modest 1.3% and effective rents at 1.6%.

Some other highlights of the Marcus & Millichap report:

* Recovery tends to be regional. Coastal areas and major Texas cities are recovering more quickly than secondary markets. Energy, technology and international trade are boosting office growth in those regions.

* Asking rents are rising. The report predicts asking rates will increase slightly to $27.92 rents, or a 1.4% gain, by year’s end. Effective rents are expected to rise to $22.49%, a 1.8% increase over the previous year.

* The greatest declines in vacancy rates for the Third Quarter: Oakland (160 basis points to 18.9%), Seattle-Tacoma (130 to 15.3%) and Denver (120 to 19.9%).

* The biggest increases in vacancy rates: Fort Lauderdale, (30 basis points to 20.4%) Las Vegas (30 to 25%) and Salt Lake (30 to 25.)

* Despite the good news, the market remains exposed to risk on many fronts, primarily unemployment. In a sector that tracks employment closely, the office market to improve only incrementally until job creation comes out of its slump.

Instant Insights /

National Office Market Rebounding Despite Blah Economy

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