Consensus Says Vacancy Rate Decline is Slowing

BOSTON-The rate at which the office vacancy rate is growing has slowed on a year-over-year basis, although it increased in the first quarter of this year, according to researchers from a number of US real estate services firms. Researchers vary in the specifics, but they see the same general trends.

Boston-based CBRE Econometric Advisors says that the office vacancy rate increased by 30 basis points to 16.6% at the end of the first quarter. While the increase did not improve over the rise of 20 basis points in the fourth quarter of last year, the rate of increase is far better than the 70 basis points increase of a year ago, CBRE Econometric points out. Grubb & Ellis figures show that the vacancy rate rose by 50 basis points to 17.9% in the first quarter, versus an increase of 30 basis points in the fourth quarter of 2009. Cassidy Turley says that the national office vacancy rate increased from 16.4% in the fourth quarter of 2009 to 16.6% in the first quarter of 2010, which is the highest vacancy rate since 2003.

In the words of Grubb & Ellis “The economy is in recovery mode, but it’s hard to tell by looking at the US office market.” First quarter absorption remained about even with the fourth quarter of 2009 at minus 7.3 million square feet, according to the Santa Ana-based company’s report on the first quarter. It said that the biggest surprise of the quarter was a 1% uptick in the average asking rental rate for class A space to $31.10. The average class B rate was $23, an increase of .8 percent. “This data series is volatile, so it is unlikely that rents have stabilized while the vacancy rate continues to rise,” the report said. “There have been anecdotes of landlords in cass A properties in primary markets pulling back on their concession packages, but this would most likely impact effective rates before asking rates. It will be interesting to see if the market can sustain this plateau next quarter.” In What Grubb & Ellis calls “a more definitive sign of recovery,” sublease space offered on the market decreased to 113 million square feet, down more than 10 million square feet over the past two quarters.

Some markets did post vacancy rate declines during the first quarter, according to CBRE Econometric Advisors. The CBRE researchers said that markets with high-tech-oriented economies and more geographically-dispersed suburban employment patterns—such as Austin, Raleigh and San Jose—made noteworthy strides. Pittsburgh, which has outperformed throughout the recession and has a small but growing biotech and healthcare industry concentration, also declined by 70 bps and is boasting a 10.9% vacancy rate—its lowest in more than 10 years, according to CBRE. When viewed along with other property sectors, the first quarter was “the best quarter for commercial real estate in quite some time,” according to CBRE. Its report cited “the decreasing rate of decline in commercial property fundamentals and the surprise of outright improvement in apartments, along with significant signs of life in the capital markets.”

According to Cassidy Turley, the data for the first quarter shows that demand for US office space continues to improve. It says that recent job growth figures indicate that the US. economy will be consuming office space again by the second or third quarter of this year.

The Grubb & Ellis forecast says that the office market appears on track to bottom out by year-end. “Employment appears to have bottomed out in the fourth quarter of 2009, meaning that vacancy should peak within the next two or three quarters if the market repeats the pattern of the last downturn,” the forecast says. “How quickly the market recovers after it hits bottom will depend on the vitality of the employment rebound and on the supply of shadow space—cubes and offices emptied by layoffs but officially counted as still occupied. That space will have to be re-occupied before net absorption can gain any traction. Most likely, the market will not return to equilibrium for at least three years after the vacancy rate peaks, meaning 2013 or 2014.”

Despite the weakness in the market, investment demand remains strong for quality buildings occuppied by credit tenants, according to a variety of sources. One of the biggest office portfolios on the market now, 11 office properties owned and occupied by the State of California and being offered for sale-leaseback, generated more than 300 offers. CB Richard Ellis is marketing the portfolio on behalf of the state and will now enter into negotiations with those portfolio buyers who have submitted the most competitive offers, according to an announcement from the state. The state anticipates announcing the selected portfolio buyer in late May.