Have The Office Markets Bottomed To A Point Where It Is Time For You To Be In The Market?
August 01, 2010
There are signs that indicate the deep freeze of the real estate market may be thawing but is it enough for you to put your toe in the water? Corporate Tenants, I will give you a look into my crystal ball to see some shifts in the market that you should be aware of:
Given these factors, I believe that if you have space leases expiring over the next five years, you should be engaged in discussions now with the market.
If you need any help navigating your space needs or the market, please call me.
- Office vacancy rates stabilizing. Contrary to some media reports, office space markets look fairly stable. I don’t believe we will have wild positive absorption anytime soon; however, of the 25 largest office markets, seven posted positive net absorption so far this year meaning that the amount of space added to the market was less than was leased. Eight of the top 25 markets had little or no change and the rest had negative net absorption. The highest office vacancies are found in the South, Southwest, and Detroit at 17% plus. The good news is that all of those markets saw office vacancy rates unchanged vs. year ago.
- Key markets to watch. Washington DC led the country with 2.3 million square feet of net absorption followed by Denver with 1.7 million and Minneapolis with 1.1 million. While New York City had the largest decline with 2.6 million square feet of negative net absorption, given the size of that market (over 400 million square feet) that is a relatively small number. In Los Angeles negative absorption was 1.9 million and Philadelphia at negative 1.1 million. Of note, all of these markets experienced negative absorption at levels far lower than a year ago. And in a few markets positive net absorption (more space being leased than is being put on the market) happened during the 2nd quarter, indicating a firming up of excess space
- Rental rates falling less sharply. Asking rental rents, while continuing to fall in the second quarter, are declining much less sharply than they had for the previous four quarters. In fact some markets including San Francisco, Seattle, and Washington, DC, saw asking rents increase during the 2nd quarter.
- No new inventory. There is virtually no new construction that will add to existing inventory. With building obsolescence factored in, the U.S. office space market could actually see negative inventory growth in 2011 and 2012 – when did you ever see this? Office markets may actually shrink. Also, financing for new construction has evaporated with the tightening of construction lending standards.
- Job growth. While this factor is nowhere near to the desired rate of a growing economy, there is evidence that among those companies and sectors that have experienced improved profits, some are beginning to hire. This may reverse trigger a slight demand for the excess inventory that was dumped on the market over the past two years.
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