U.S. Office Market Continued
To Improve Last Year
The U.S. office market continued to improve in the fourth quarter and for all of 2005. The fourth quarter marked the seventh straight quarter of vacancy declines, with rental rates showing their strongest annual growth in five years, real-estate executives said.
The U.S. vacancy rate dropped in the fourth quarter to 14.7%, down from 15% in the third quarter and 16.3% in the 2004 fourth quarter, according to a survey by Reis Inc., a New York-based commercial-real-estate research firm.
Meanwhile, "absorption" -- the net change in occupied space -- increased to 16 million square feet in the fourth quarter, up from 13.6 million in the third quarter. For the full year, the U.S. market absorbed 61.3 million square feet, the best performance since 2000, the firm said. Effective rents -- the negotiated price after concessions to tenants -- gained 1% in the quarter and 3.2% for the year, to $20.65 a square foot, the highest percentage increase in five years.
"This is a continuation of the positive strides in the market, which we've seen over the last couple of years as the markets have gained momentum in their recovery phase," said Dan Quan, senior office analyst and director of quality control at Reis.
Yet the overall numbers mask some disparities. Certain markets have demonstrated strong gains, particularly those enjoying public-sector job growth. The office markets in New York and parts of California, for instance, have benefited from expanding jobs in international trade and the financial sector. Some other markets, though generally improving, have relatively high vacancy rates, and tenants still have strong negotiating power.
Generally, the best numbers are seen on the two coasts, with Washington, D.C., leading all markets with a vacancy rate of 7.2%. Rounding out the top five, all with vacancies of less than 10%, were Orange County, Calif.; Palm Beach, Fla.; New York City's Manhattan; and San Bernardino, Calif. Cities where landlords saw the most improvement in negotiating their rents were San Francisco; Fort Lauderdale, Fla.; Orange County, Calif.; Miami and San Diego.
By contrast, slower improvement was seen in office markets particularly hard-hit by industrial-job losses or overbuilding years ago. In some isolated cases, such as Detroit, the office market weakened in 2005. Of the 69 markets followed by Reis (which no longer includes New Orleans, because of the vacancies caused by Hurricane Katrina), Greenville, S.C., had the highest vacancy rate, with 24.1%, followed by Dallas; Rochester, N.Y.; Cleveland and Detroit.
But even several longtime strugglers saw gains in 2005. Dallas, though still saddled with a vacancy rate of 23.6%, absorbed more than three million square feet for the year and showed its first positive effective rent growth since 2000.
One factor benefiting existing office space is the high cost of new construction. As a result, 35.4 million square feet of new office space was completed in 2005, up from the 30.8 million the previous year but sharply lower than the 126.1 million completed in 2001, Reis reported.
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