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      Q1 2014 Office Market Trends

      Incremental Improvements Are No Longer a Surprise


      Vacancies fell by a paltry 10 basis points this quarter, ending at 16.8 percent. While this seems like a miniscule movement, other indicators suggest a market that’s beginning to tighten, with improvement in fundamentals beginning to accelerate. Completions remained relatively low, with only 6.3 million square feet coming online, but absorption hit 9.9 million square feet, the highest figure since 2007. Asking and effective rents have risen for 14 consecutive quarters, and if job growth of between 200,000 to 220,000 jobs does materialize then demand for office space should improve – although in this day and age of shrinking office space usage it won’t be a one-to-one correspondence.


      Should We Expect Demand to Increase in 2014?


      While our expectations remain relatively modest, with vacancies falling at a moderate pace, there are signs that market participants are looking to other sectors aside from multifamily to catch “the recovery wave” before pricing and fundamentals really reflect renewed strength. A handful of spec office building developments – zero prelease commitments! – are already in the works, albeit for relatively small projects in vibrant tech and energy markets. This would have been unheard of a year or two ago. While we don’t expect effective rent growth at the national level to accelerate until vacancies drop by another 200 basis points, investors may be eyeing specific neighborhoods that they expect to outperform, and as usual a closer examination of demand and supply dynamics is in order to weed out opportunities when not many people are looking.


      Market Highlights


      Performance at the metro level generally reflects the pace of improvement of the real economy, with wide variations across markets. The technology and energy sectors continue to drive the creation of higher paying jobs, and office market performance reflects this. In the first quarter, eight of the top ten markets ranked by effective rent growth have a meaningful technology or energy sector presence - San Jose, San Francisco, Dallas, Houston, New York, Austin, Seattle and Oklahoma City.


      Topics: Office, Vacancy Rates, Articles, Rents, Absorption Rates, Construction, All