Office Leasing

Source: CoStar Group Inc.

Continued Recovery

By Walter Page

Fueled by an expected three-year tripling in net absorption and minimal construction activity, office vacancy rates are expected to exhibit a continued solid recovery in the first quarter of 2013. Specifically, office vacancy rates have declined from 12.8 percent in first quarter 2010 to 12.2 percent as of first quarter 2012 and are expected to decline by a robust 60 basis points to 11.6 percent by first quarter 2013. This decline in vacancy is significant because we are now nearing the critical point at which office rents typically show significant growth, compared to declines in recent years.

Supporting this view are the following factors:

  • Because office rents are 8 to 10 percent below long-term trends, the market has significant rent upside prior to the resumption of new construction.
  • The supply of large-block space is now below average in a number of technology markets, leaving tenants with fewer options in these markets and more fuel for rent growth.
  • Most metros are showing a below-average supply of small-block space, suggesting that small-tenant job growth is strong.
  • The decline in vacancy rates in most markets is now nearing the point at which rent growth resumed in prior recoveries.

On an overall basis, gross office asking rents were up slightly (under 1 percent) in the first quarter of 2012 over prior quarters, with most markets showing a reduction in office concessions for free rent. The greatest rent increases were in technology markets, including a 19 percent year-over-year increase in San Francisco CBD rents.

—Walter Page is director of research, office, for CoStar Group Inc.