New York, NY, October 10, 2005--Vacancies in the nation's office market fell to their lowest level in 3½ years in the third quarter while rents rose, a new survey said. Recent weakness in the jobs market could cut the recovery short, real-estate executives said.
The U.S. vacancy rate dropped to 15.1% in the third quarter from 15.4% in the second, according to the survey of the top 70 U.S. office markets by Reis Inc., a commercial real-estate research firm based in New York.
Effective rents -- the amount of money a landlord takes in after factoring in concessions to tenants -- rose for the third-straight quarter, heading up 0.8% to $20.41 a square foot from $20.24 in the second quarter. That is doubly good for office owners because asking rents went up just 0.6% in the quarter. That means landlords are dropping the concessions, like free months of rent, that they have used to lure tenants for the last four years.
While the office market is clearly in recovery after three harsh years, Hurricane Katrina has clouded an economic outlook already weighed down by high energy prices. U.S. payrolls shrank in September for the first time in more than two years due to the disruptions from the hurricane, and the unemployment rate hit 5.1% last month, compared with 4.9% in August. The health of the office market is directly related to employment.
"There's still some risk that these three quarters of positive effective rent growth is tentative," says Lloyd Lynford, Reis' chief executive. "There are new risks that have recently emerged."
The absorption rate -- the net change in occupied space -- was 12.1 million square feet in the third quarter, down from 20.2 million in the second quarter.
Still, by all accounts the office market is in much better shape than it has been. Vacancies are down 1.8 percentage point from their peak of 16.9% in the first quarter of 2004. Rents are up 2.2% from the beginning of this year and construction is restrained.
Just 6.5 million square feet of new office buildings were completed in the third quarter, down from 8.3 million square feet a year ago. For 2005, Reis projects 36.7 million square feet of new offices will be completed, up from the 30.4 million completed last year, but well below the cyclical peak of 121.8 million square feet in 2001. Next year, Reis projects 43.2 million square feet of new office buildings.
If the economic rough patch is just that and job growth picks up in the fourth quarter and on into next year, Reis projects 82 million square feet will be absorbed in 2006, enough to drop the vacancy rate to 13.8% and raise rents significantly.
