CALABASAS, CA-We reported the other day that the rate of commercial real estate job postings was outpacing the return of jobs across the broader recovery. But like the economy, CRE is not a one-size-fits-all discipline and the broad-brush view won’t allow for the nuances of specific disciplines.

That brings us to the office sector, which was one of the last horses to leave the gate when the economy began its fits-and-starts recovery. In fact, on a nationwide basis, leasing activity is starting to emulate 2007 levels, before the Big Dump took place, reports Marcus & Millichap senior vice president and managing director Hessam Nadji.

“Over the past 12 months, vacancy rates in most markets tightened significantly, lowering the national office vacancy rate by 50 basis points to 16.5% as of the first quarter of this year. Net absorption approached 17.9 million square feet in the Q1, a 41% increase over one year ago.”

Boosting that impressive gain in leasing, of course, is the restraint developers are using. M&M reports that the 55 million feet of inventory that was added in Q1 represents a 47% decrease over last year’s Q1.

Of course, the good news is the bad news and, as Nadji says, “Lender and investor belief in the sustainability of the US economic recovery, as well as more capital sources entering the arena, has resulted in a significant ramp up in new supply in select gateway metros.” Of course, it can be argued, that it is the gateway cities that are best able to absorb that increased inventory.

On the sales side, volume totaled $96.3 billion in 2012, outpacing 2011 by 30%. “Although the $20-million-plus segment captured three-quarters of the sales volume,” Nadji points out, “the largest percentage increase occurred in the $10-million-to-$20-million tranche, a trend likely to continue this year based on patterns in first-quarter sales volume.” In that time, the median per-square-foot price was $199, a nearly 26% jump from the year before (but still a 15% discount off of 2007).

“Cap rates for properties located in primary, secondary and tertiary markets changed significantly after the recession,” the MD says. “The broad spread between them underscores how investors are clearly pricing in risk for locational attributes.

“Cap rates for primary markets at 7.1% have decreased 130 basis points since the recession,” he continues, “but remain 90 basis points higher than the peak of the market. Secondary and tertiary markets’ cap rates remain 150 and 229 basis points, respectively, higher than those recorded in 2007.”

So what about the months to come? The research points to some interesting trends, and prime among them is the factoid that while 2.5 million jobs are expected to come online this year (a 1.9% hike), office-using jobs are expected to increase 4.2%.

  • “The number of office-using jobs is now less than 2% off its peak level recorded at the start of the recession, says the research. “Office fundamentals will strengthen over the remainder of the year, and revenue generation likely will be achieved more through occupancy gains than rent growth in most markets. In addition, free rent incentives will likely diminish and tenant improvement packages will become less generous as the year progresses.”
  • “Six markets: New York City; Boston: Washington, DC; Houston; San Jose; and San Francisco will comprise nearly 35% of the projected 52 million square feet of new supply in 2013,” says Nadji. “In each of those markets, demand is forecast to well surpass new supply. Net absorption is forecast to total 98 million feet nationwide, reducing the national vacancy rate by 80 basis points to 15.9% by year end. Asking rents are forecast to rise 2.5% to $27.03 per square foot; reductions in concessions will drive even stronger effective rent growth.”

“Yields in primary markets have compressed to the point that core or value-add opportunities located in the best submarkets of secondary markets may offer better returns,” says Nadji. “The momentum behind CMBS issuance, which totaled $37.4 billion through May of this year, provides a less risk-averse capital source for properties outside the primary/core box. The higher yields and greater discount to replacement cost in secondary markets offer a powerful incentive to investors interested in recovery plays.”