Leasing Sentiment Up, but U.S. Office Fundamentals Remain Weak in Q3

by CoyDavidson on October 26, 2009

Vacancies up (less); rents down (less); net absorption (less) negative….’Less Bad is the new Good’

BOSTON, Oct. 26 — Despite more vigorous leasing activity, consistent with a stabilizing economy, United States office vacancies rose another half point during the third quarter of 2009, coming in at 16.0 percent, according to the Q3 office report from Colliers International, a leading global real estate services firm.  As with the previous quarter, national office vacancies kept rising in both downtown and suburban markets. The downtown vacancy rate increased 37 basis points and the suburban vacancy rate jumped 66 basis points.

Absorption presented a relative bright-spot during the July through September period.  While occupied space shrank during Q3, registering negative 17.7 million square feet (msf), this decrease was less than the negative 25 msf posted in the first and second quarters of this year.  Thus, “less bad is the new good.”

Class A office buildings in downtown markets fared best in Q3, with 25 of the 56 CBD markets surveyed by Colliers showing positive quarterly net absorption.  Suburban markets were more lackluster, reflected by 18 of 55 suburban markets under study by Colliers with vacancy rates in excess of 20 percent.

Rental rates for office space continued their decline across all space classes in both suburban and downtown markets.  Suburban Class A rents were down 1.6 percent during Q3 and 5.4 percent year-over-year (weighted average).  Downtown Class A rents were down 2.7 percent in Q3 and 18.8 percent year-over-year (weighted average).  The weighted average downtown Class A rent stood at $40.09 per square foot (psf) and the suburban Class A rent posted $26.95 psf at the close of the third quarter.

As for new construction, total new Q3 supply was 16.8 msf, with 4.4 msf newly-completed in downtown markets and 12.4 msf newly-completed in the suburbs.  This total amount of new office completions was 500,000 square feet more than the amount delivered in Q2, and 1.4 msf more than the first quarter’s new supply.  An additional 51.0 msf is currently under construction, with 29.7 msf pending for downtown markets and 21.3 msf for the suburbs. Construction activity has tapered off, such that it is very quickly approaching barely-discernable levels.

“Even though the overarching picture still looks bleak, we perceive glimmers of hope on the horizon,” remarked Ross Moore, executive vice president and director of market & economic research for Colliers International.  “Leasing activity was up in nearly every market we surveyed, and we’re seeing a resurgence of confidence on a few fronts.  A select group of tenants can now access the capital markets, and confidence in their own ongoing health has unleashed some pent-up demand for office space.  We see tenants increasingly willing to go long on their leases, and the oft-predicted bearish scenario of skyrocketing sublease space never played out.  While we’re nowhere near out of the woods, we feel confident that the office market has turned a corner and will be poised for improvement in the second half of 2010.”

View the full press release

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