The Market Dynamics for Large Office Space Users Could Turn Quickly

by CoyDavidson on November 11, 2010

Office Vacancies are at Cyclical Highs, But Shortages Loom

By: Ross Moore, Chief Economist – Colliers International USA

The third quarter national office vacancy rate moved marginally lower during the July – September period, but at 16.3%, vacancies were still near cyclical highs and at levels experienced following the tech bust of 2001-2002. Most observers would agree it is a tenants’ market characterized by abundant supply and depressed rents. Landlords are generally very flexible on terms and remain extremely aggressive both in their efforts to attract new as well as retain existing tenants. One part of the market, however, that could turn quickly into a landlord’s market is office buildings that house large tenants where office users often occupy 200,000 square feet or more.

Very Few Large Blocks of Office Space Currently Available and Almost No Construction Underway

Below is current data on large blocks of available office space in select downtown markets. What can be observed is that beyond Manhattan, many cities have just a handful of options available to large tenants. While this is not completely unusual, what is different this time around is with relatively little new supply over the past several years, the space that is available today is scattered across many buildings and many floors, as opposed to new construction which is almost always found in large blocks of contiguous space. Furthermore, big tenants can’t rely on large speculative developments that might provide relief in coming years due to the dearth of downtown office development underway. At the end of the third quarter just 10.7 million square feet was under construction, however, nearly 25 percent was 1 World Trade Center in downtown Manhattan, leaving very little for the balance of the 53 downtown markets tracked by Colliers.

So What Does This Mean for Rents – and Office Development?

Economics 101 taught most of us that when demand exceeds supply, prices go up. With such a scenario almost upon us, higher rents are almost guaranteed, perhaps not imminently, but certainly within a few years. This will mark the beginning of the next development cycle, usually with a limited number of build-to-suits leading the way. In the interim, however, rents for the limited number of large blocks of space available to lease can only go up. Modest economic growth is a prerequisite for the unfolding of such events but a key point is an economic boom is not required. Landlords may be able to move tenants around to accommodate any large requirements in the market but this just delays the inevitable. The U.S. office market is about to embark on a unique period characterized by economic expansion with no significant office development other than downtown Manhattan. This will be an interesting time, and possibly a profitable time for landlords, but very challenging for certain tenants.

Ross Moore is the Colliers International’s Chief Economist with a focus on providing bottom-up and top-down analysis of commercial real estate markets across the United States. In addition to his North America wide reports, Ross also authors all global research produced by Colliers.

  • Arnold Offur

    Well thats a great news for everyone especially the business owners who are lookng for a larger office spaces .. and for those who want to expand their business. This is a great opportunity for everyone.

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