Office Market Recovery Strengthens

Analysts at Cassidy Turley and CBRE are predicting significant gains in the U.S. office market as the economy continues to recovery and the professional job market grows. Seats …

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Analysts at Cassidy Turley and CBRE are predicting significant gains in the U.S. office market as the economy continues to recovery and the professional job market grows. Seats are filling in offices throughout the country and the growing employment helped to slash national office sector vacancy rates by more than 15% in the last quarter. Increased demand, lack of new construction and good small-business growth has even pushed growth in secondary markets. The only major market to see an increase in vacancy was Washington, D.C., likely due to sequestration, but many investors have hope for a turnaround there as well. For more on this continue reading the following article from National Real Estate Investor.

The office market continued its climb upward during the second quarter, with the national vacancy rate falling to 15.3 percent, according to reports by CBRE and Cassidy Turley.

Gains in the professional jobs market and tightness in availability should push the market to full recovery by the end of the year, according to experts from the two firms. Art Jones, senior managing economist at CBRE Econometric Advisors, says monthly payroll gains averaged almost 200,000 jobs per month in the second quarter, a significant improvement from 2012.

“I think for the next six months you’re going to see office employment gains reach pre-recession peak figures, setting the stage for stronger and more consistent market moves by January,” Jones says. “That’s not in just the high tech and the energy markets, which continue to lead the nation, but as the housing markets improve you’re going to see the office market hit its stride, with likely 4 percent to 5 percent rent growth in 2014.”

Both CBRE and Cassidy Turley recorded office occupancy improvements in most major markets in the second quarter. Boston and Houston gained the most of the larger markets, both gaining 50 basis points in occupancy in the quarter, to 12.1 percent and 12.0 percent, respectively, according to CBRE. Toledo, Ohio and Riverside, Calif. led the markets by recording 170-basis-point increases in the quarter.

The office market absorbed about 15.1 million sq. ft. in the second quarter, up from five million sq. ft. in the first quarter, according to Cassidy Turley report. New York City led major markets, with 1.7 million sq. ft. absorbed. Accordingly, office rent growth in the Big Apple has increased, pushing New York City back into the top 10 most expensive global markets. New York is at the bottom of the list, averaging $120.65 per sq. ft., while Hong Kong has remained at the top of the list at $235.23 per sq. ft.

Experts at both CBRE and CT agree that the tightness from improved demand and a lack of new construction has pushed tenants into secondary markets and/or class-B offices. Jones says a few downtowns such as Manhattan and San Francisco have tightened into the single-digit vacancy range, pushing tenants and investors seeking reasonable prices into the suburbs. “We’re seeing small business formation improve, and those firms are all looking for space in affordable areas such as Newark or Oakland, Calif.,” he says.

The West Coast is a hot spot for office leasing and building sales, Jones says. Rents in major California markets lost about 30 percent during the recession, but have already grown back to pre-recession levels. Big deals abound, such as Hines’ $550 million sale of the One Wilshire, Raytheon and DirectTV buildings in the Los Angeles area in May to executives from Menlo Park, Calif.-based GI Partners.

Washington, D.C. was the only major U.S. office market to register an increase in vacancy, by 20 basis points to 14.4 percent, according to CBRE. Jones says the fundamentals of the city are still great, but sequestration and other federal cuts are impacting the city in the short term. The General Services Administration accounts for about 20 percent of the multitenant office market, he says, with the federal government still enforcing a freeze on new leasing and efficiency space reductions. ““I think in the long term you’re going to see some of those jobs come back strong, though you’ll see a shift from federal jobs to the private sector,” Jones says.

The U.S. capital still has its believers, however, as the New York City-based Rockefeller Group recently announced it has raised $250 million for joint-venture acquisitions of 1.3 million sq. ft. of office space in Washington, D.C. and San Francisco. Dennis Irvin, president and CEO of the company, said his firm gained the funds from nine third-party investors that included Japanese and European pension plans. “Our investors share our confidence in the stability and value of high quality, well-located office assets in core U.S. markets,” he said in a statement.

This article was republished with permission from National Real Estate Investor.

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