NEW YORK CITY — The U.S. office sector is poised for continued growth in the second half of 2015, though stagnant vacancy has slightly tempered previously high expectations, according to the latest Reis analysis based on second-quarter data.
“Occupied stock rose by 8.4 million square feet, outpacing new completions of 8.3 million square feet in the second quarter,” reports Victor Calanog, chief economist and senior vice president at New York-based Reis. “While this was not sufficient to nudge vacancies downward, it still does provide evidence of a slow simmer in terms of leasing activity. Employers are hiring, albeit slowly, and are leasing up space at the same plodding pace.”
Vacancy rates in the office sector, which remained at 16.6 percent in the first and second quarters of 2015, vary by location. In central business districts (CBDs), the vacancy rate stood at 13.3 percent in the second quarter as opposed to 18.3 percent in suburban areas. The report notes that this is a reversal from the 1990s, when CBD vacancy rates were higher than those in suburbs as employers sought lower crime rates and better school systems.
Another struggle for suburban areas is large inventory. From 1990 to 2010, more than 80 percent of new construction occurred in suburban areas. During the 2008-2009 recession, these developments were hit hard. “[The] gulf in vacancy between CBDs and suburbs is likely to persist, even as they both continue to see further vacancy compression,” says Calanog.
Rent growth slowed by 20 basis points from first quarter figures, following a trend of second-quarter rent growth slowdowns set in previous years. Asking and effective rates both grew by .7 percent, according to the report.
“The share of markets posting positive absorption over the last five quarters is certainly heartening,” says Calanog, as 68 of Reis’s top 82 primary markets posted an increase in occupied stock. Following suit, only seven of Reis’s top primary markets posted flat or declining effective rents in the second quarter.
Among the top metros, New York and Washington, D.C., continue to be the tightest markets in the country, with vacancy rates of 9.6 and 9.3 percent, respectively. San Francisco is gaining on these markets with a 10.8 percent vacancy rate.
“Reis expects office fundamentals to improve at a slightly faster rate for the remainder of the year; though our GDP projections have been lowered to 2.4 to 2.6 percent, this still means that the bulk economic growth will be concentrated in the latter half of the year, which should be a boon for rents and occupancies,” the report concludes.
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— Katie Sloan