Office Market Continues Rebound: Colliers Report

Around the country, absorption is up, vacancy is slipping and rents for Class A product in central business districts are on the rise.

By any number of measures, the U.S. office market is bouncing back, concludes a new report from Colliers International.  Among other encouraging indicators, absorption is on the rise, vacancy is slipping and pricing for Class A product in central business districts is beginning to creep up.

The findings prompted Dylan Taylor, Colliers’ CEO for U.S. operations, to declare that the office market is “in the midst of a full-fledged comeback” and speculate that further improvement is ahead. “As the velocity of this recovery accelerates over the next few months, we would expect to see additional occupancy gains and increased rental rates throughout a growing number of key markets,”  Taylor commented in a statement on Wednesday. Although hiring by office tenants is a major factor , a dearth of new product is doing a great deal to tighten the market. The volume of new inventory coming on line declined from 5.5 million square feet in the third quarter to 3.8 million square feet in the fourth.

Improvement continued to gain traction during the fourth quarter of 2010, according to Colliers’ survey of 62 largest U.S. office markets. The national vacancy rate declined 29 basis points to 16.15 percent over the last three months of the year, while the market absorbed 14.8 million square feet. Washington, D.C., Manhattan and San Francisco maintained their familiar places as the nation’s top performers during the quarter. In Manhattan, availability dropped 30 basis points to 13 percent. Leasing volume in San Francisco neared 2 million square feet in the last three months of the year, a 300,000-square-foot increase from the city’s historical average. Yet these heavyweights were not the only markets to show gains. Occupancy also ticked up in markets that have underperformed during the recession, notably Dallas, Chicago and Denver.

Other signs of tightening are a nearly 4 million-square-foot drop in available sublease space, which declined from 64.8 million to 60.9 million square feet from the third to the fourth quarters. Class A rental rates in the nation’s suburban markets softened by 1.5 percent to $26.04 per square foot, but central business district pricing edged up by 0.9 percent to $32.29 per square foot. That discrepancy is also reflected in another sizeable difference; Class A central business district properties registered 16.02 percent vacancy at the end of 2010, more than 200 basis points better than the 18.34 percent rate for Class A suburb an properties. Yet by another metric, suburban markets also flexed their muscles during the fourth quarter, accounting for about two-thirds of leasing absorption nationwide. That showing marked a major jump from the third quarter, when those same markets managed only 46 percent of leasing absorption.