U.S. Office Market First Look: 2009-Q3

The latest U.S. office results for Q3 2009 and forecast from Bob Bach, Senior Economist at Grubb & Ellis


· The vacancy rate ended the third quarter at 17.1 percent, up 50 basis points from the second quarter. By comparison, vacancy in the first and second quarters increased by 80 and 100 basis points, respectively, which suggests some moderation in the pace of softening.
· Manhattan, despite its starring role in the credit crisis, retained the second-lowest major-market vacancy rate in the nation at 8.6 percent, bested only by the adjacent Outer Boroughs market at 8.4 percent. Tenant move-outs over the next six months are expected to add more empty space. Vacancy was highest in Phoenix at 26.3 percent followed by Detroit at 24.4 percent. Over the past four quarters, vacancy in Silicon Valley rose by 730 basis points to 19.1 percent, the fastest increase in the nation.
· Third-quarter net absorption totaled negative 11.3 million square feet, an improvement over the first and second quarters when tenants vacated a combined 37.6 million square feet. Absorption was positive in 20 of 67 markets led by Baltimore with 686,000 square feet. Pittsburgh, Austin and San Antonio also ranked near the top, suggesting some resilience in the Mid-Atlantic and central Texas regions. Seattle, Chicago and Boston saw occupied space shrink by 1 million square feet or more.
· Space under construction ended the quarter at 45.6 million square feet, its lowest level in more than four years. The pipeline will continue to empty for several more quarters as existing construction projects are finished and new starts are rare.
· In the second quarter, we noted that the inventory of available sublease space added a negligible 1.4 million square feet, a hopeful sign. Unfortunately it was a false alarm as the third quarter brought 10.5 million square feet of newly offered sublease space. The total now stands at 124 million square feet, not far from the all-time peak of 146 million square feet in 2002.
· Asking rental rates eased lower in the third quarter with Class A and B rates down by 1.9 and 1.3 percent respectively. Over the past four quarters, Class A and B rates are off by 4.3 and 3.7 percent. There is some evidence that the pace of decline is accelerating. Year-to-date effective rates, which include periods of free rent and above-standard tenant improvement allowances, are off by 15 percent compared with 2008.

Forecast

For a sustained office market recovery, employers must start adding jobs. Most economists think that hiring will be sluggish for several more months and possibly years. IHS Global Insight predicts the total number of jobs in the U.S. will not return to pre-recession levels until 2013, which implies that the office vacancy rate will not return to equilibrium until perhaps 2014. The slower pace of deterioration in the vacancy and absorption rates during the third quarter is a hopeful sign. One theory among economists is that panicked employers “over-fired” after the credit markets froze in September 2008. The faster pace of deterioration in the leasing market during the first and second quarters may have reflected this panic. Now that the recession appears to be winding down, tenants may feel less of a need to further slash their space requirements. Nevertheless, the office market is unlikely to embark on a sustained recovery before 2011.

To view more graphs depicting the nation's office market, click here to open an Excel file and then click through the worksheet tabs at the bottom of the page.