July 9, 2007 / 4:04 AM / in 12 years

US suburban office space demand grows with supply

NEW YORK, July 9 (Reuters) - U.S. suburban office space has become a favorite among developers and is attracting tenants squeezed out of downtowns by surging rents, according to a report by real estate services company CB Richard Ellis Group Inc. CBG.N.

The amount of newly completed U.S. office space climbed to about 11.5 million square feet in the second quarter, and roughly 10 million of that was in the suburbs, according to the firm’s U.S National Office Vacancy Index, released on Monday.

Tenants quickly claimed the new space, and more, absorbing 17 million square feet, with 14 million in suburban buildings.

“The markets are receiving new space and still want more,” said Ward Caswell, CB Richard Ellis’s U.S. director of research.

“We saw most of the construction in the suburbs,” he said. “But we also saw most of the demand in the suburbs. The suburbs have definitely and will always be a bargain compared to downtown.”

For the past three to four years, the U.S. office market has been boosted by strong U.S. job creation. Vacancy rates in the second quarter continued to fall.

“At this part of the cycle you’re always trying to see if there’s going to be too much construction,” Caswell said. “This stuff takes a while to come on line, and we have seen a nice steady growth in the construction level. But what we’re seeing is that construction is still outpaced by absorption.”

Demand from growing economies such as China has driven up the cost of building materials and construction equipment. That has curbed the overbuilding in the United States seen in the 1980s and that led to an early-1990s real estate depression.

“What we’re seeing in the U.S. is a stable platform, so for investors this is very good news seeing these numbers today,” Caswell said.

In the past three years, investors have snapped up office buildings in key U.S. cities and quickly sold them at a profit. But many experts don’t expect the steep price rises to continue, meaning investors will seek returns through rent.

“For tenants, this is an indicator that rents are going to rise,” Caswell said. “While there is new space coming online, which gives them more options to chose from, there is even more competition for that space.”

The trend should help both the office landlords in key U.S. cities — companies such as Vornado Realty Trust (VNO.N), Boston Properties Inc. (BXP.N) and SL Green Realty Corp. (SLG.N) — and those who focus on suburban offices, such as Brandywine Realty Trust (BDN.N), Highwoods Properties Inc. (HIW.N) and Colonial Properties Trust CLP.N.

Nationally, the vacancy rate was 12.6 percent, down 0.2 percentage points from the first quarter and 1.1 percentage points from the year-earlier quarter.

Downtown office vacancy last quarter was 10.6 percent, down 0.2 percentage points from the first quarter. Suburban office vacancy also fell 0.2 percentage points, to 13.7 percent.

At 3.1 percent, Charlotte, North Carolina had the lowest downtown office vacancy rate. Midtown Manhattan followed with a 4.8 percent vacancy rate. Downtown Manhattan was third with a 7 percent vacancy rate. Boston had a 7.1 percent rate, and the top five was rounded out by Las Vegas, posting an 8.5 percent vacancy rate.

The lowest suburban office market vacancy rates were seen in Florida with the suburbs of Miami posting the lowest vacancy rate at 6.5 percent. The Fort Lauderdale suburbs were next at 7 percent, and the Orlando suburban market was third at 7.7 percent.

San Jose, California saw the greatest vacancy rate improvement among downtown markets, falling 5.6 percentage points to 14.4 percent. Tucson, Arizona’s downtown vacancy rate dropped 3.8 percentage points to 12.2 percent, while Houston’s rate fell 2.5 percentage points to 11.9 percent.

Cincinnati, Ohio led as the most-improved suburban market with a 2.1 percentage-point fall to 18.5 percent. The suburbs of Columbus, Ohio fell 1.7 percentage points to 19.3 percent, while Kansas City suburbs dropped 1.5 points to 17.2 percent.

“I’m big on Ohio,” Caswell said. “I still think as long term, the Midwest is a real bargain”

But Detroit claimed the spot as having the greatest vacancy rates, with its downtown vacancy rate coming in at 27 percent and the suburbs at 24.6 percent.

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