Office leasing markets across most of North America suffered through another difficult quarter with rising vacancy levels and falling rents, but signs were beginning to emerge that the worst may be past. With the U.S. economy showing hints of expansion and noticeable improvement in financial markets, many businesses were beginning to express and interest in signing new leases after a prolonged period of inactivity. Many remained concerned, however, over the continued loss of jobs in almost all regions and all sectors of the economy.
For the seventh consecutive quarter, tenants returned more space to the market than they leased, helping to push the national vacancy rate up for the eighth consecutive three-month period. A limited supply of office development also came on the market during the third quarter, helping to put upward pressure on the U.S office vacancy rate. Rents again moved downward as landlords competed for tenants in an attempt to keep occupancies from declining further. This was again more apparent in downtown markets, but suburban rents also moved lower. The last quarter of 2009 and early 2010 will see a further weakening in office market fundamentals, but not to the same extent as construction dries up and companies no longer feel the need to dispose of space. The peak in vacancy is now in sight; soon the long , slow move to recovery can begin.
Vacancies continue to go up. The U.S. national office vacancy rate again moved higher during the third quarter, marking the eighth consecutive increase. Even though sublease space increased by only 1.4 million square feet (MSF) to total 88.1 MSF (10.9% of vacant space), the overall vacancy rate increased 57 basis points to register 16.03%. Vacancy levels are now back to Q# 2004 levels. The downtown vacancy rate increased 37 basis points to register 14.15%, while suburban vacancies increased 66 basis points to total 16.92%. Canadian vacancy rates also moved higher, with CBD vacancies rising 82 basis points to 6.14%, compared with suburban vacancies, which increased 32 basis points to 8.53%.
Office tenants still returning space to the market. Third quarter absorption was again negative, with occupied space contracting by 17.7 MSF. This was the seventh consecutive of contraction and was significantly worse than a year ago, when absorption was -2.2 MSF, but a sizeable improvement from Q2 when occupied space fell by 25.1 MSF. Companies continue to shed space, but the rate at which vacancy is entering the market looks to have slowed and Q2 may mark the low point in this cycle. Canadian markets also recorded a contraction in occupied space with 82,000 square feet returned to the market.
Rents continue to decline. For the fifth consecutive quarter, downtown lease rates dropped, with Q3 Class A asking rents dipping by 2.7% to $40.09 per square foot. Major markets such as Lower Manhattan, Boston, Chicago, Denver and Seattle contributed to the quarterly decline. Suburban asking rents also fell during the quarter, declining by 1.6% to $26.95 per square foot. Year-over-year CBD rents are down 18.8% while suburban rents are down 5.4%. Office rents in Canada also fell with CBD rents declining 1.5% during the quarter while suburban rents moved 3.0% lower.
View the full Report: North America Office Highlights 3Q 2009