CHICAGO — Grubb & Ellis Senior Vice President and Chief Economist Bob Bach released a report this week analyzing the national office market, and how it's stood up relatively well in the face of recent challenges in the economy.
“Defying the economic headwinds, the office market turned in a reasonably strong performance in the Q3,” Bach wrote.
To wit, the national office vacancy rate ended the quarter at 17.0 percent, down 30 basis points from Q2. The decline of 70 bps in the last two quarters, however, remains on the low side of a “normal” recovery cycle. Vacancy remains 90 bps below the peak, still well above the 12 to 14 percent range that represents a balanced market.
“Although vacancy has been consistently lower in CBD markets, both CBD and suburban markets are recovering at a comparable pace,” Bach added. Notably, CBD vacancy fell from 14.7 percent in Q2 to 14.4 percent in Q3 while suburban vacancy declined from 18.7 percent to 18.4 percent during this period (see chart below for historical vacancy data).
Source: Grubb & Ellis
In all, Q3 saw 11.8 million square feet absorbed, falling just short of the 12.0 million square feet absorbed in Q3.
“Class A properties captured nearly all of the demand, [which is] typical for the early stages of a recovery when tenants take advantage of depressed rents to move up from Class B properties,” said Bach. “Space completions in Q3 totaled just 1.8 million square feet, far below absorption, and this mismatch was responsible for the decline in the vacancy rate. About a third of that total was in Washington, D.C. and its environs.”
Space offered for sublease continued to drop, ending the quarter at 77.6 million square feet — back in what Bach refers to as a “normal” range.
Average rental rates fluctuated little at the national level. The average Class A asking rate for space available at the end of Q3 was $31.12 per square foot per year, full service gross, up 6 cents (0.2 percent) from the Q2. Class A rates were pushed higher by tightening conditions in a handful of supply-constrained CBD markets including New York Midtown, Boston, the District of Columbia and San Francisco. The average Class B rate of $22.84 was 7 cents (0.3 percent) below the Q2.
Finally, new construction remains low, as expected. However, Q3 ended with 22.8 million square feet under construction, compared with 19.5 million square feet in Q2. Spec accounts for about two-thirds of that total, and more than half of the new space is located in New York and Washington, D.C.
Forecast
Despite uncertainties affecting the economy in general, such as the debt ceiling debate in the U.S. and the worsening sovereign debt crisis in Europe, the office market is showing signs of “a bona fide recovery cycle,” said Bach. However, there is cautious optimism, because the office market typically lags the economy, and the current numbers could be a result of economic strength earlier in the year.
“On the other hand, [the improving numbers] could be a sign that underlying business confidence is stronger than the economic data suggest,” Bach added. “Expect the recovery to continue over the next few quarters but at a slower pace until at least early next year.”
— Dan Marcec