New York, NY, January 7--Companies have contracted got more office space in the fourth quarter than they have in any quarter in the past four years, pushing vacancies down sharply, stabilizing rents and confirming that the sector is finally in recovery after several weak years, according to a new survey.
The findings suggest that firms are continuing to hire or are preparing to create more jobs.
The vacancy rate fell to 16.2% in the fourth quarter from 16.6% in the third quarter, according to the survey of the top 64 U.S. markets by Reis Inc., a New York-based commercial-real-estate research firm. Rents were flat for the second quarter in a row, after 16 straight quarters of declines, at $20.11 per square foot per year.
Absorption, the net change in total occupied space, was 20 million square feet in the fourth quarter, the most in four years.
For the year, absorption totaled 40.8 million square feet, compared with negative 8.5 million square feet in 2003 and negative 35.9 million square feet in 2002. The vacancy rate has fallen 0.7 percentage point from its peak of 16.9% in the fourth quarter of 2003.
The real-estate industry weathered the recent downturn far better than it handled the bust of the late 1980s, which fed the savings-and-loan crisis and helped drag the economy into recession.
This time -- despite similar vacancies and an unprecedented string of negative absorption that lasted three years -- a combination of low interest rates, better management and a lack of speculative building has prevented a rash of foreclosures. Developers and financiers put the brakes on new construction soon after the stock-market bubble popped, and the 29.1 million square feet of commercial space completed in 2004 was the least since 1996.
Reis projects about 34 million square feet of new buildings this year, up slightly from 2004 but well below the peak of 136.8 million square feet added in 1999. About 70% of this year's new space is preleased, Ms. Sicola said.
With the new demand, landlords aren't handing out rent concessions for commercial space anymore. "We could see this turning into a landlord's market by the end of 2005," Ms. Sicola said.
Still, vacancies are more than double the 7.7% rate in the third quarter of 2000, when the market peaked, and rents are down more than 20% from their high of $25.34 a foot in the first quarter of 2001. And owners of Class B and C buildings, which are less desirable properties for tenants, face a tougher battle than those who own trophy buildings. Tenants have flocked to Class A buildings during the downturn, taking advantage of cheaper rents to trade up as their leases expired in lower-quality buildings.
Some individual markets are much worse off than the country as a whole. Dallas continued to lag behind the national average, with vacancies there topping 26% -- five percentage points higher than the second-worst market, San Jose, Calif.
But others, especially those in Southern California and the Washington area, continue to perform strongly. Washington's vacancy rate sits at 7.4%, and Orange County registered the highest rent growth, with rents up 1.2% in the fourth quarter.
