Lack of Building Bodes Well for US Office Vacancy

NEW YORK CITY-The limited supply of new office product either under construction or on the drawing board here makes it typical of coastal gateway markets, a circumstance that should help tighten availability in those markets, two new national office reports say. A rise in leasing activity will help support rent growth in these markets, according to Cushman & Wakefield’s 2011-2013 office market forecast, released Thursday.

For example, average asking rents in Midtown and Midtown South will rebound over the next three years by $10.84 and $9.80 per square foot, respectively, C&W says. Leading the way nationally will be San Francisco with a 33% increase by ’13. The nation’s lowest office vacancy by that time will be achieved by Midtown South; C&W projects a vacancy rate of 4.4% in ’13 for the submarket, thanks in part to nearly 400,000 new jobs met by a little more than 400,000 square feet of new supply.

Similarly, Marcus & Millichap notes that less than 20 million square feet of new supply is slated to come on line across the US this year. The firm’s new National Office Report says that projected positive net absorption of 37.4 million square feet this year will mean the first vacancy improvement in four years, with the average US rate dropping to 17%. Leading the way are East Coast markets with high barriers to entry: New York City, Boston and Washington, DC.

The gradual recovery in the national economy is already beginning to bear fruit in the office sector. C&W says that of the 75 CBD and suburban office markets it tracks, “more than half reported vacancy rates that were essentially flat or down over the past 12 months.” Leasing volume rose 31.6% year-over-year in CBD office markets and 20.2% in the suburbs, says C&W.

However, the rising tide is not lifting all boats at the same rate. “The recovery in space demand will likely be anything but even this year,” according to the Marcus & Millichap report. Although class A office space stands to benefit from both “large companies well-positioned to expand and negotiate lower lease rates” and class B tenants looking to move up, the report says that “tight, credit and less favorable balance sheets among small to mid-sized companies will impede a recovery in lower-tier space.” The C&W report predicted that major cities’ office markets will tighten faster than their suburban counterparts, due particularly to the greater difficulty smaller businesses still face in obtaining credit.

C&W’s report notes that although asking rents are hitting bottom, most markets aren’t going to see significant increases until next year at the earliest. More than two-thirds of the office markets tracked by C&W saw year-over-year declines last year.

However, the firm’s report says, “some markets have started to buck this trend.” They include Washington, DC, where rents jumped 9.1% by the end of 2010 to reach $50.97 per square foot; Boston, with a 2.6% year-over-year gain at $25.86 per square foot; and Midtown, which recorded a 1% increase to end the year at $62.46 per square foot.