"U.S. Office Market First Look: 2011-Q1"
- The first quarter brought further improvement in some leasing market metrics, but the rate of improvement is disappointing.
- The vacancy rate was stable at 17.7 percent, no change from the fourth quarter and down by a slim 20 basis points from the cyclical peak recorded in the first and second quarters of 2010. Vacancy remains well above the equilibrium level of 12-14 percent where landlords and tenants negotiate on an even playing field.
- Absorption was low but positive, ending the quarter at 5.0 million square feet. During the 2005-2007 expansion, by comparison, the quarterly average was 18 million square feet.
- Absorption barely outpaced completions, which totaled 4.7 million square feet for the quarter. Projects left in the construction pipeline totaled 16.4 million square feet, the lowest level in nearly two decades. Two towers under construction on the World Trade Center site account for more than one-third of the space still under construction.
- The average Class A asking rental rate for space available at the end of the first quarter was $31.59 per square foot per year, full service gross, a surprising increase of 1.3 percent from the fourth quarter. This was the first increase since the second quarter of 2008. The average Class B rate of $23.22 was 0.8 percent above the fourth quarter. The gains were paced by selected CBD markets on the East and West coasts.
- Sublease space hit a three-year low of 84.4 million square feet.
The office leasing market just completed its fourth consecutive quarter in the recovery cycle, but the pace of recovery is sluggish. The vacancy rate has declined by 20 basis points from the peak compared with a normal recovery where the decline should be more like 200 basis points by now, i.e. 50 basis points per quarter. Corporate profits and cash reserves are high, and companies are starting to hire at a faster pace. But the backlog of shadow space – cubes, wings and floors emptied by layoffs while still under lease – is a significant drag on new demand for space. With oil prices continuing to escalate, many economists have backed off their aggressive forecasts for GDP growth this year. A near-term recession is unlikely, but the pace of economic recovery looks less certain than it did one quarter ago. There is little on the horizon to suggest that the office market recovery is about to pick up the pace.