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Office Sector Fundamentals Strengthen During Second Quarter

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WASHINGTON, D.C. — Demand for U.S. office space strengthened during the second quarter of 2013, as 60 out of the 82 metros tracked registered positive gains in occupancy, according to Cassidy Turley.

U.S. office markets absorbed 15.1 million square feet of office space in the second quarter, compared to 5 million square feet in the first quarter. The current reading represents the third strongest quarter in the recovery, which began in 2010. Vacancy rates in the second quarter inched down 10 basis points to 15.3 percent. Vacancy is now 1.9 percent lower than its recessionary peak of 17.2 percent.
“Even though there is a general push for space efficiency across most markets, business growth has been strong enough to generate consistent improvement in the office-leasing fundamentals,” says Kevin Thorpe, chief economist at Cassidy Turley. “The demand metrics continue to be the strongest at the high end (Class A) and the low end (Class C) of the market, while the middle segment of the market continues to struggle to retain existing tenants or find new ones.”
Average asking rents in the second quarter registered at $21.74, up 3 cents from the same period a year-ago. New office construction this year ticked up from 49.8 million square feet in the first quarter to 50.3 million square feet in the second quarter.
“It is interesting to observe that tenants are consistently gravitating to newer buildings, and yet, that segment remains supply constrained,” says Thorpe. “New development remains 30 percent below the norm. So this one sliver of the market, new space, is entering into a tight supply/strong demand scenario. Rents could very well soar for the new office space that delivers to the market over the next 12 to 24 months.”
The top 10 strongest markets in terms of demand for office space were New York with 1.7 million square feet of net absorption; San Jose, Calif., with 1.2 million square feet; Houston with 1.1 million square feet; Atlanta with 800,000 square feet; Chicago with 780,000 square feet; Omaha, Neb., with 703,000 square feet; Oakland, Calif., with 672,000 square feet; Central New Jersey with 622,000 square feet; Anaheim, Calif., with 580,000 square feet; and Northern New Jersey with 470,000 square feet.
The top 10 strongest markets in terms of rent growth were Salt Lake City with 11.3 percent year-over-year rental appreciation; Denver with 9.8 percent; New York with 9 percent; San Jose with 8.5 percent; Columbus, Ohio, with 8.4 percent; Austin, Texas, with 7.7 percent; San Francisco with 6.3 percent; Nashville, Tenn., with 5.9 percent; Baltimore with 4.6 percent; and San Mateo, Calif., with 4.2 percent rent growth.
— Staff Reports

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