U.S. office market barely gains in third quarter

NEW YORK Tue Oct 2, 2012 12:20am EDT

The skyline of Manhattan's Financial District is seen from Governors Island, in New York, July 3, 2012. REUTERS/Andrew Burton

The skyline of Manhattan's Financial District is seen from Governors Island, in New York, July 3, 2012.

Credit: Reuters/Andrew Burton

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NEW YORK (Reuters) - The U.S. office market recovery remained stalled in the third quarter as uncertainty over the upcoming federal elections, U.S. tax policy and Europe's fiscal problems crimped job growth, keeping demand for office space limp and rent growth anemic.

"We're stuck," said Ryan Severino, senior economist for Reis Inc, which released its third-quarter office report on Tuesday.

Reis also sees no significant improvement for the rest of the year.

"The office market is not going to move in the right direction until the labor market starts to move in the right direction," Severino said. "Nobody is going to lease space until they're hiring, and nobody is going to hire until they feel more confident about the direction of the economy."

Office markets where the technology or energy sectors are thriving continued to be the rare bright spots in office leasing in the third quarter, according to Reis's preliminary results quarterly results.

Landlords have followed the jobs. For example SL Green Realty Corp, one of the biggest Midtown Manhattan office landlords, said on Monday that it bought two relatively small 110-year old buildings for $173 million or $648 per square foot in the neighboring tech-rich Midtown South market.

Over the past 12 months, office rents posted the strongest growth in markets where then tech and energy sectors are thriving. San Francisco rents rose 5 percent over the past 12 months followed by New York, which was up 4.1 percent. San Jose rents rose 2.7 percent, and Houston and Austin rents were up 2.5 percent.

But overall, the average asking rent for U.S. office space rose only 1.4 percent over the past 12 months and just 0.2 percent to $28.23 per square foot from the second quarter.

Effective rent, which takes into account months of free rent and other perks landlords offer to lure or keep tenants, rose 0.3 percent to $22.78 per square foot.

In bad news for landlords and good news for their tenants, the increase in rent is decelerating. Rents are mired in 2007 levels, meaning that the office rents have effectively trod water for the last five years.

"We have to go back to the fourth quarter of 2010 to find rent growth more tepid than the growth rates we have observed over the last two quarters," the Reis report said.

Meanwhile, the vacancy rate dipped in the third quarter by a scant 0.1 percentage point to 17.2 percent from the second quarter. The vacancy rate declined by just 0.30 percentage points compared with a year earlier.

The national office vacancy rate remained at a level unseen since 1993 and well above the pre-recession cyclical low of 12.5 percent in 2007. The rate also remained stubbornly close to the cyclical high of 17.6 percent in the third and fourth quarters 2010 and the first quarter of last year.

Washington, D.C. and New York were the tightest markets in the country. New York's vacancy rate declined to 10.1 percent from 10.3 percent but the vacancy rate in Washington D.C. rose to 9.5 from 9.4 percent.

Las Vegas continued to be the poorest performing market, weighed down by the fallout from the housing bust.

(Reporting By Ilaina Jonas; Editing by Tim Dobbyn)

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