* U.S. office vacancy rate inches down 0.1 percentage point
* New office construction lowest since 1999
* Rents mark small increase
* SF, Houston, NY, San Jose lead rent rate increases
* Washington property market on guard
By Ilaina Jonas
NEW YORK, April 2 The U.S. office vacancy rate
fell only slightly during the first quarter, as a lack of
significant job growth continued to impede demand for space,
according to a quarterly report released on Tuesday.
At the same time, U.S. office construction during the first
quarter reached a 14-year low as developers remain spooked by
soft demand and meager rent growth, according to real estate
research firm Reis Inc.
Persistent lackluster U.S. job growth was behind the 0.1
percentage point U.S. office vacancy rate decline. Demand for
office space hinges on hiring workers to fill it. Although
hiring in February reached 236,000, that level has not yet been
consistent enough to convince employers to commit to leasing
more space. In areas where the growing technology and energy
industries are dominant employers, rents are increasing much
faster than the national average.
The first-quarter vacancy rate stood at 17 percent compared
with 17.1 percent in the fourth quarter, according to
preliminary figures from Reis. The vacancy rate was down a scant
0.30 percentage point from the prior first quarter.
"It's really in line with our expected trends, given that
hiring hasn't accelerated," said Victor Calanog, Reis' vice
president of research. "It's so indicative of weak demand in the
office sector that quarterly construction figures are at a
historic low and yet vacancies are not really cratering."
Much of the vacancy decline can be attributed to a lack of
new supply and not a strengthening of demand for space.
In the first quarter, only 1.578 million square feet of new
office space came online in the United States, fewer square feet
than some Manhattan office buildings. It was the lowest
quarterly amount of new completions since Reis began publishing
quarterly data in 1999.
Businesses occupied only 4 million more square feet in the
first quarter, an increase equal to the prior quarter but more
than 20 percent lower than the 5.3 million square feet the prior
On an annual rate, the additional 4 million square feet
absorbed in the first quarter would translate into one-third to
one-fourth the rate traditionally leased up during a comparable
time in a recovery period, Calanog said.
Although the first-quarter's vacancy rate is well below the
cyclical peak of 17.6 percent seen in the second half of 2010,
it remains far above the 12.5 percent cyclical low in the third
quarter of 2007 before the onset of the recession.
Given high vacancy rates and lenders that are still skittish
about committing relatively large amounts for construction and
development financing, it is hard to justify breaking ground on
new office projects, Reis said.
Meanwhile, the national effective rental rate - which
measures rents after subtracting months of free rent and other
costs that landlords incur to attract tenants - grew at the
glacial pace of 0.7 percent to $23.15 per square foot during the
Before those costs, asking rent also grew by only 0.7
percentage to $28.66 per square foot.
That was a slowdown from the 0.8 percent pace in the fourth
quarter but still greater than the quarterly average of about
0.4 percent increase seen since rents began rising consistently
in the fourth quarter of 2010. Reis tracks 79 U.S. office
The U.S. effective rent is still about 7.7 percent below the
peak level in the second quarter of 2008, right before the
collapse of Lehman Brothers sparked a financial meltdown.
Still, the U.S. property market is really a collective of
vastly different local markets. Property markets that have
strong energy or technology sectors have fared vastly better
than the nation as a whole.
San Francisco, New York, Houston, and San Jose, California,
all saw effective rent growth rise more than a full percentage
point. Effective rent in San Francisco rose 1.7 percent to
$35.60 per square foot annually, while New York's rose 1.6
percent to $49.63 per square foot. Houston was No. 3, with rent
up 1.5 percent to $21.22 per square foot, and San Jose was up
1.1 percent at $24.65 per square foot.
Phoenix, Las Vegas, Detroit and Dayton, Ohio, had vacancy
rates of at least 26 percent, Reis said.
At 9.5 percent, Washington D.C. had the lowest vacancy rate
in the first quarter. Reis does not expect that to continue.
"We're looking at rising vacancies at least over the next
couple of years," Calanog said, adding that the surrounding
office markets also will feel the brunt of U.S. budgetary cuts.