North American Office Highlights – 2Q 2012

by CoyDavidson on August 27, 2012

Offices Absorption Positive, but Shrinking

For the first time in nearly five years, U.S. office vacancy rate dropped below 15 percent in Q1 of this year. This downward trend continued in Q2. Office absorption also appears to be slowing: North American offices absorbed 19.2 million square feet in the first half of 2012, down six percent from the second half of 2011. In addition, demand is weaker for office than other commercial property types. For example, office absorption in the first half of 2012 is just 30 percent of the 63.3 million square feet of industrial absorption.

ICEE Markets Still Hot

In our last North America Highlights report, we introduced the concept of ICEE (Intellectual Capital, Energy and Education) markets, which are defined by the predominance of employment demand drivers linked to technology, energy and higher education. Markets such as Houston, Seattle and Silicon Valley fall into the ICEE category.

Employment growth in energy, technology and knowledge industries has caused office demand to improve the most in ICEE markets. This trend continued in Q2 2012, as ICEE office markets captured a disproportionate share of absorption. Nine of the ten markets with the highest absorption fall into the ICEE category, led by Houston, Oklahoma City and Boston.

Market Highlights

  • ICEE (Intellectual Capital, Energy and Education) markets continue to generate a disproportionate share of office absorption. Nine of the ten highest absorption numbers are in ICEE markets.
  • Office transaction activity is slowing. According to Real Capital Analytics, office sales are down 21 percent in the first half of 2012 compared to the second half of 2011. May was the first month in 2012 to register a year-over-year decline in office building sales.
  • Monthly delinquency rates for CMBS loans collateralized by office properties continue to set all-time records. July saw another all-time high—the fifth straight month in which the delinquency rate has increased.
  • The average office vacancy rate for North America is improving, but at a slower pace than in 2011. The rate declined a modest 13 basis points to 14.29 percent.
  • U.S. new supply continues to come online at approximately the same pace as the trailing five quarter average. With 38.4 million square feet of new construction still underway, additions to supply will impede improvement in occupancy or rental rates over the next 4 to 8 quarters.

Houston is the Top Market for Net Absorption

Colliers monitors eighty-three North American office markets, totaling 6.4 billion square feet of inventory. Of these, the twenty-five largest markets constitute approximately sixty-five percent of the 6.4 billion square feet of office space. These 25 markets account for 56 percent of the 25 million square feet of year-to-date net absorption, yet only fourteen have a vacancy rate below the Q2 average of 14.78 percent.

  • The top 10 office markets account for 40 percent of Q2 2012 vacant office space. Among these, only Washington, D.C., New York and Houston have vacancy rates below 14.78%, the U.S. average.
  • The top 10 markets account for 36 percent of year-to-date net absorption, approximately 9 million square feet. Houston, Boston, Atlanta and Chicago lead the pack, with each market recording more than 1 million square feet of net absorption year-to-date.

You can view the 2Q-2012 Houston Office Market Report here.

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