Optimism in the Office Market

by CoyDavidson on October 5, 2010

Is the office market finally starting to improve?

The 3rd quarter ended and we are starting to to see the market reports on the performance of the U.S Office Market in the media. The Wall Street Journal reported the U.S Office Market is beginning to show signs of improvement in a story today titled “Signs of Recovery For Office Market

For those of us on the front lines of leasing office space and assisting companies with their real estate requirements, the tone of these reports come as no surprise. The media’s recent coverage of the office sector has been driven by 3rd quarter data released by the commercial real estate information firm, Reis.

You will begin to see more headlines as other real estate informations firms such as CoStar release their 3rd quarter data, as well as the major commercial real estate service providers, including my firm Colliers International.

Here is what you can take away from all these reports and media stories:

  • U.S office vacancy is at the highest level since 1993.
  • With the exception of a couple specific markets, office fundamentals are not really significantly improving but starting to stabilize.
  • There is a lot of discussion about office space density and the trend of companies looking to do more with less space.
  • Significant improvement in the office market will be dependent on the labor market, specifically employment in the office using industries.
  • Class A office projects are performing the best as there is a trend of “flight to quality” from both the leasing and investment side.
  • Discussion regarding the debt markets and the CMBS sector continues and while it important issue, it has nothing to do with trends in office space demand.

The consensus opinion is that for most cities around the country we are in the very early stages of the recovery phase in the commercial real estate market cycle and that it will be a long road back for the office market. I think a quote from leading real estate economist, Sam Chandan of Real Capital  Analytics sums it up best, “It’s too soon to get excited about office fundamentals.”

For the office tenant it remains a great time to restructure office leases through relocation, renewal and negotiations. The deterioration of office market fundamentals is clearly slowing, but Landlords are still offering attractive leasing packages to retain and lure quality office tenants.

Stay tuned for our 3rd Quarter Houston Office Market Report. Here is just a little hint, “you are not going to see much improvement in Houston office market fundamentals.”

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