Sluggish economy slows US office market rebound

* Second-quarter vacancy rate flat say two reports

* Dearth of new supply helps support rents

By Ilaina Jonas

NEW YORK, July 6 (Reuters) - The U.S. office market vacancy rate was flat in the second quarter compared with the first, as the sluggish economy sapped the confidence of business tenants, according to two reports issued on Wednesday.

"The fundamental question for commercial real estate right now, lenders, buyers, investors is when is corporate America going to increase its rate of hiring and investment," said Christopher Macke, senior real estate strategist for real estate research firm CoStar Group.

The U.S. office market is in the early phase of a recovery from the recession with vacancies only recently creeping down from a cyclical high reached last year.

Rents, which had fallen as much as 50 percent in some markets, have begun to creep up, but those increases were smaller in the second quarter which was marked by limited hiring, high fuel prices and financial markets nervously eyeing European debt problems.

"I don't think this derails everything overall, said Ryan Severino, economist for real estate research firm Reis, which released its second-quarter preliminary results for the office market. "The issues we're seeing are temporary, and we're likely not to change our forecast of a slow, steady recovery.

The U.S. office vacancy rate stood at 17.5 percent at the end of the second quarter, according to Reis. The rate was the same as the first quarter, when vacancies posted the first decline in nearly four years.

Washington D.C. was the tightest market, with a vacancy rate of 9 percent, while New York was second with 10.7 percent, according to Reis. Detroit had the highest vacancy rate at 26.7 percent, followed closely by Phoenix at 26.5 percent.

The average asking rent rose 0.2 percent to $27.72 per square foot, according to Reis. Factoring in months of free rent and other concessions landlords offer to attract tenants, the so-called effective rent also rose 0.2 percent in the second quarter, to $22.25 per square feet.

Effective rents in San Francisco grew the most of markets Reis covers, up 1.3 percent to an average $31.23 per square foot. But New York, where effective rent grew 0.6 percent, remained the most expensive at an average of $46.22 per square foot.

During the quarter, 22 out of 79 markets Reis tracks showed effective rents decreasing, down from 34 and indicating the improvement is spreading, Severino said.

Stronger rents in major U.S. office markets favor large real estate investment trusts such as Boston Properties Inc (BXP.N), SL Green Realty Corp (SLG.N), Vornado Realty Trust (VNO.N) and Brookfield Properties Inc (BPO.N).

During the second quarter, only 1.8 million square feet of new office space was added, the lowest level of completions since Reis began publishing quarterly data in 1999.

CoStar, which tracks 143 markets compared with Reis's 79 metro markets, put that figure at 8 million, the lowest level in 40 years.

"It's the lack of new supply that is bailing out the office market right now," said CoStar's Macke. "At some point we're going to need to see an increase in demand if we're really going to see the office market recovery accelerate."

CoStar also reported a flat second-quarter U.S. office vacancy rate but put the figure at 12.6 percent, only slightly below the 12.8 percent peak seen in the first three quarters of 2010.

The average asking rent was also about flat, according to CoStar, dipping slightly to $21.34 a quarter foot, from $21.46 in the first quarter. (Reporting by Ilaina Jonas; Editing by Tim Dobbyn)