NEW YORK CITY — Cushman & Wakefield reported from its mid-year 2011 statistics that the second quarter marked the largest quarterly decline in the overall average vacancy rate since 2007 for the U.S. Central Business District (CBD) office market nationwide.
The overall average vacancy rate for U.S. CBDs fell to 13.9 percent at mid-year 2011, down 0.7 percentage points from 14.6 percent at the end of the first quarter of this year. This markets its lowest level since mid-year 2009, when vacancy measured 13.7 percent. Vacancy rates declined in 71 percent of the markets tracked by Cushman & Wakefield, with the strongest drops in markets including Miami, Midtown South Manhattan and Washington, D.C.
LOWEST NATIONAL VACANCY RATES
Source: Cushman & Wakefield
* Indicates change in “percentage points” from prior quarter (not percent)
“Though the recovery is muted especially with respect to employment growth, there is pent up demand,” says Maria Sicola, executive managing director and head of Americas Research for Cushman & Wakefield. “With corporate profits going up especially in the technology sector, activity is picking up in anticipation of continued growth.”
The trigger for the significant decline in vacancy was a notable increase in new leasing activity in U.S. CBDs, up 43.9 percent from mid-year 2010 levels. With 41.8 million square feet in new office leases signed year-to-date, the first half of 2011 proved to be the strongest in terms of leasing activity since 1998, when 44.5 million square feet in leases were completed in the first half of the year. In the second quarter of 2011 alone, 23.6 million square feet in leases were signed, the highest three-month total since the third quarter of 2006.
“At this point in the year, there has been more new leasing activity than we had at midyear 2006 and 2007 – two extremely strong years,” says Sicola. “If activity continues at this pace, 2011 will be on track for a historic year.”
With no new construction completed in U.S. CBDs in the second quarter, year-to-date construction completions remained at the first quarter total of 2.3 million square feet. An additional 2.1 million square feet of new office space is expected to be completed by year-end, with projects underway in Washington, D.C., Houston, Miami and Portland.
The levels of leasing activity and no new construction proved positive for absorption, which has totaled 7.1 million square feet year-to-date nationwide, compared to negative 441,498 square feet at this time last year. With 6.4 million square feet absorbed in the second quarter, absorption was positive for the third consecutive quarter.
Another significant element influencing leasing activity is the economic recovery on the horizon, when tenants know rental rates will rise. As a result, many companies are taking advantage now of static or minimally rising rents. Average rental rates nationwide were $35.86 per square foot at midyear 2011, a $0.63 decline from this time last year.
HIGHEST AVERAGE ASKING RENTS
Source: Cushman & Wakefield
“As activity accelerates, and without new supply in the pipeline, rents will grow in some markets, and they ARE going up in certain areas,” says Sicola. “In San Francisco’s South of Market, rents are up 30 percent already. Leasing activity and declining vacancies have given us a strong indicator in which direction the market is moving. While the national average for rental rates remained stagnant, more than half of the U.S. markets we track did see an increase, and looking forward the remainder are expected to follow suit by year-end.”
— Dan Marcec