Office, Apartment Rentals
Seem Set to Grow More

The office-leasing and rental-apartment markets, two of the real-estate sectors hardest hit in the downturn of the past few years, are poised for continued growth in 2006 following moderate gains this year, according to a new study by real-estate investment brokerage firm Marcus & Millichap.

The study predicts increases in occupancy and rent in the office market next year, as moderate job growth is expected to create demand for more space. The rental apartment market is forecast to continue its recent gains.

The report -- which ranks 42 U.S. markets in terms of the health of several indicators including rent growth, vacancy, construction and absorption -- ranks the New York City office market at the top of its list in 2006.

In the office sector, the report forecasts that effective rents -- rents that landlords actually collect, not the asking price -- will grow on average nationally by 4%. Office vacancies are predicted to drop to 13.7% by the end of 2006 from a projected fourth-quarter national vacancy rate of around 15%. Marcus & Millichap predicts New York will have the U.S.'s lowest vacancy level next year, at 8.7%.

There also could be a few surprises in store for the office market, says Hessam Nadji, a managing director and chief marketing officer at Marcus & Millichap, Encino, Calif.

For the first time since the tech-industry crash in 2001, an office market in California's Bay Area has reached the top 10. Oakland ranks ninth on the list; Mr. Nadji says Oakland's office market has recovered faster than the San Francisco and San Jose markets that overheated during the dot-com boom and then suffered during the bust.

Fort Lauderdale, Fla., experienced the biggest slip in the office-market rankings, falling five spots to No. 6. Mr. Nadji says years of strong economic growth in that city spurred office construction, increasing supply.

For the past 18 months, the rental-apartment market has been steadily climbing out of a slump that began in 2001. Marcus & Millichap expects the recovery to continue in 2006 because of modest employment gains in some cities, the high cost of homeownership and the reduction in the rental supply due to the conversion of apartments into condos. As a result, the study predicts that in 2006, the apartment market will show "the healthiest effective rent growth since the market peak of 2000."

Leading the firm's 2006 rankings of apartment markets are Orange County, Calif.; Fort Lauderdale; Las Vegas; San Diego; and New York City.

Fort Lauderdale gained markedly in the apartment market, rising six places in the study's ranks to No. 2. That improvement is largely the result of condo conversions which have winnowed the rental supply, Mr. Nadji says. Conversions are a major driver behind the firm's predictions for positive fundamentals in the apartment markets in New York, Las Vegas and West Palm Beach, Fla.

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