Still Largely a Tenant’s Market, but for How Long? by Cassidy Turley
Cassidy Turley’s third-quarter 2013 “U.S. Office Trends Report,” released last week, disclosed that U.S. markets absorbed 13.3 million square feet of space during this time period, down from 15.9 million square feet in the second quarter. The third-quarter vacancy rate was largely unchanged from last quarter at 15.2 percent. Vacancy rates are now 2 percent lower than their recessionary peak.
“Demand for office space is still subpar, but, nevertheless, it has been consistently positive for multiple, consecutive quarters,” said Kevin Thorpe, chief economist at Cassidy Turley, earlier this month. “At the same time, new supply remains extremely constrained. In fact, demand for office space has now exceeded new supply for over two years. So the office sector is clearly tightening in most cities across the country.”
As the third quarter came to a close, 56.9 million square feet (msf) of office space were under construction, up from 54.5 msf in the prior quarter. New office construction is still 30 percent below pre-recession levels. Average asking rents in the third quarter of 2013 registered at $21.91, up 19 cents from the same period a year ago, and 45 out of the 80 metros tracked registered rent growth.
“It’s still a tenant’s market in most U.S. cities, meaning businesses still have leverage when negotiating for lower rents and attractive concession packages,” said Thorpe. “But because of limited new supply, the pendulum is slowly shifting from a tenant’s market to a landlord’s market. Supply/demand fundamentals suggest the bulk of the country will be pushing office rents upward by this time next year.”
According to the report, “the top 10 strongest markets in terms of office space demand over the quarter were Houston with 1.7 msf of net absorption, New York with 1.3 msf; Phoenix with 1.0 msf, Atlanta with 740,000 sf, Denver with 668,000 sf, Chicago with 659,000 sf, Los Angeles with 561,000 sf, San Mateo County (CA) with 516,000 sf, Seattle with 499,000 sf, and Central New Jersey with 467,000 sf.”
“The top 10 strongest markets in terms of rent growth,” the report continued, “were San Francisco with a 15.7 percent year-over-year rental appreciation, Denver with 9 percent, New York with 8.1 percent, Oakland-East Bay with 6.3 percent, San Jose with 6 percent, Los Angeles and Baltimore with 5.3 percent, San Mateo County with 4.4 percent, Houston with 4.3 percent, and Nashville with 3.4 percent.
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