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      Q2 2014 Office Market Trends

      Recovery Takes Root in Unlikely Places

      The national vacancy rate remained unchanged at 16.8% in the second quarter, hardly a departure from past periods in this lackluster recovery. After vacancies peaked at 17.6% in late 2010, any registered declines were only 10 basis points at most, in any given quarter. That means that in the last three and a half years, national office vacancies have only fallen by a pathetic 80 basis points—not a surprise given an economic recovery averaging 2% per year since 2009.

      Still, what is interesting about this period is how certain MSAs exhibited a faster pace of improvement in fundamentals, versus the usual suspects. Among the top 10 markets that recorded the greatest vacancy compression this quarter, only Seattle could be classified as a tech-oriented market. Even Las Vegas recorded a 40 basis point drop in vacancies, albeit from a relatively high level in the mid 20s.

      This represents somewhat of a divergence from the early stages of the office market recovery when the technology and energy markets were often among the markets with the strongest vacancy compression on a quarterly basis. While this does not mean that technology and energy markets are no longer performing well, it does suggest that the recovery in the office sector might finally be gaining breadth. Labor market data supports such a conclusion - net job gains have exceeded 200,000 jobs per month over each of the last four months and in 8 of the last 12 months. If stronger labor market gains persist, the recovery in the office market should become more pervasive, across an increasing number of MSAs.

      Approximately 4.33 million SF of new supply came online in the second quarter; net absorption was slightly weaker, at 2.97 million SF. This is in line with the lack of change in national vacancy rates, and is symptomatic of the lag in leasing up new space vis-à-vis job growth. While employers are adding to head count, they are most likely assigning new staff to underutilized space. Still, there are confirmed reports of new projects greenlit for financing despite the lack of pre-lease requirements, implying that a growing number of market participants are taking bets on a faster pace of recovery for the office sector in the near future.


      Market Highlights

      While patterns in vacancy rate compression at the metro level are starting to change, patterns in rent growth appear similar. The markets that had the strongest effective rent growth during the quarter were predominantly markets that had a meaningful technology or energy presence, such as Houston, San Jose, San Francisco, Dallas, New York, and markets like San Diego and Orange County which have technology enclaves. The year-over-year effective rent growth calculation yields roughly similar market rankings. Other markets will need to see their vacancy rates tighten further before they experience greater rent increases. These technology and energy markets began recovering earliest and in many the vacancy rate is below the threshold where vacancy compression translates into significant rent growth.

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