New York, NY, July 1--The U.S. office real-estate market appears to be building strength, as employment growth led companies to take up more space in the second quarter than they have in more than three years, according to a new survey.
Companies absorbed an additional 6.1 million square feet of office space in the quarter, according to the survey of the top 61 office markets by Reis Inc., a commercial real-estate research firm based in New York. Absorption is the net change in occupied space in the 3.66-billion-square-foot U.S. office market. In the first quarter, absorption was 1.32 million.
The vacancy rate held steady at 16.8% in the second quarter from the previous quarter, as new construction added nearly as much space to the market as companies took. Builders finished 5.94 million square feet of new office space in the second quarter, down 25% from the 7.93 million square feet added a year earlier.
Developers have put a clamp on construction, slowing to a projected 31 million square feet of new space this year from 143 million square feet in 1999, according to Reis.
For companies looking for space, the news was still good: Rents continued to decline for the 13th straight quarter, but the decreases are smaller. Effective rents -- or the actual rent paid, which takes into account inducements like free rent and office buildouts -- fell to $20.21 a square foot per year in the second quarter from $20.29 a square foot in the first. That was a 0.4% drop, compared with a 0.7% decline in the first quarter and a 1.9% fall in the second quarter of 2003.
The U.S. economy added nearly a million jobs from March to May, so companies need more space for employees, said Lloyd Lynford, chief executive of Reis.
But the overhang of so-called shadow space--office area that is leased but empty--while diminishing rapidly, will still put a brake on rent increases for the near future. "We still have a long way to go before the fundamentals are stabilized sufficiently so that landlords can push rents," Mr. Lynford said. Effective rents are down 20.2% since their peak in the first quarter of 2001.
"There's significant activity in most of our markets," said Mitchell Rudin, president of U.S. transactions for CB Richard Ellis, a commercial real-estate-services firm based in Los Angeles. "More people are looking at space...and not just because it's a great time to lock in low rents, but now it's based on anticipated growth needs."
The Washington, D.C., market was the strongest in the nation, with a 7.7% vacancy rate, making it the only market below 10%. San Bernardino, Calif., was next at 10.2%. New York, the nation's biggest market, was third at 10.6% -- still a high number for New York, which typically has much lower vacancies than the national average.
Dallas was the weakest market in the second quarter with a 26.5% vacancy rate. San Jose, Calif., was next to last with 23.4% of its office space vacant. At 16.8%, the national vacancy rate still more than doubled the 7.5% rate in the third quarter of 2000, when the market began its precipitous slide.
