Report Finds Nation's Office Vacancies Declined for Sixth Consecutive Quarter

WASHINGTON, DC-The nation’s office vacancy rate declined for the sixth consecutive quarter, according Grubb & Ellis’ winter 2000-2001 issue of Office Market Trends. This decline is in spite of “a litany of complications including the dot-com blues, a NASDAQ Bear market, a slowing economy and the potential for more interest rate hikes by the Federal Reserve,” the report says.

Even though construction increased while net absorption fell, the office vacancy rate declined by 15 basis points from 8.65% in the second quarter to 8.5% in the third. According to Grubb & Ellis figures, speculative construction topped out at 94.1 million sf at the end of the third quarter compared with 88.3 million sf in the second quarter and 68.6 million sf feet in the first quarter. Build-to-suit construction also increased, ending the quarter at 30.8 million sf underway. This is the second highest total of the current cycle.

Although net absorption declined in the third quarter, it was more sustainable than the previous four quarters. Third quarter absorption totaled 19.4 million sf, down from the 34.4 million sf absorbed in the second quarter, but well in line with the quarterly average of 15.1 million sf from 1997 through 1999, the report says.

Though third quarter demand was lower, rental rates continued increasing in many markets. The previous four quarters’ average asking rent for class A space rose 14.9%, including an increase of 7.3% in suburban markets and 23.4% in central business districts. Class B rents increased because of tenants trying to avoid class A rates, the report says. During the prior four quarters, the weighted average increase in class B rents was 16.5%, incorporating a gain of 27.3% in CBD markets and 9.9% in the suburbs. While CBD rent increases are impressive, the tightest markets, including Manhattan, Boston, Washington, DC, San Francisco and Seattle, are also among the largest.

Closures of dot-com firms had little effect on the market, according to the report. Even though many are subleasing space, the Grubb & Ellis analysis indicates that the sublease totals actually decreased slightly in the third quarter.