C&W Report Predicts Office-Space Demand & Rental-Rate Rise In U.S. Cities And Suburbs Through 2007
22 Mar, 2006, New York, NY
Northern California, Phoenix, Washington D.C. / Northern Virginia region and New York City region expected to outperform comparable markets over next 24 months
Demand for office space over the next 24 months is expected to lead to rising rental rates in 37 U.S. markets, according to the Cushman & Wakefield U.S. Office Market Barometer, a gauge of real estate performance and expectations in 55 U.S. downtown and suburban markets based on data compiled at year-end 2005.
The anticipated rental rate increase is based on a variety of factors, most notably positive absorption in 2005 of more than 55 million square feet of office space in the U.S., and less than 18 million square feet of new office construction-completions. Last year, suburban markets added 12.4 million square feet of new office space, the least amount in nine years, while cities added 5.2 million square feet, the least amount in seven years.
"An imbalance in the near-term between office-space demand and office development will lead to a spike in average rents of more than $2.00 per square foot in several major downtown markets over the next two years," said Maria Sicola, senior managing director of Research for Cushman & Wakefield.
According to Ms. Sicola, office developers have signaled their belief in the strength of suburban markets, "where more office space is under construction today than during any period in the last four years."
The Cushman & Wakefield Barometer classifies U.S. cities and suburbs in four categories based on multiple factors, led by a market's prior six-month performance and 24-month outlook. The classifications include Leading, Peaking, Strengthening and Leveling. A classification of Leading characterizes a market with strong prior six-month performance and an equally strong 24 month outlook. A Leveling market indicates a weaker previous six months and 24 month outlook considered against the fundamentals of comparable U.S. markets.
The Cushman & Wakefield Barometer identified four regions of the country with particularly strong characteristics as of yearend. These include Northern California, Phoenix, the Washington, D.C./Northern Virginia region and the New York City region.
In Northern California, the San Francisco and Silicon Valley markets are classified as Strengthening, with positive 24 month outlooks. Silicon Valley is expected to experience growth in average rents of more than $1.00 per square foot over the next two years, while San Francisco is expected to see rental growth of as much as $2.00 per square foot for the same period.
In 2005, the San Francisco downtown posted more than one million square feet of positive absorption, its highest level since 2000. The market has recorded 2.2 million square feet over the past 10 quarters, with year-over-year vacancies declining from 17.4 percent to 14.8 percent. The suburban market posted positive absorption of 921,476 square feet in 2005, its highest mark since 1999.
In Phoenix, the central business district is experiencing revitalization, with new residential development underway, new infrastructure improvements occurring, and expansion commitments from major employers like Arizona State University. The Cushman & Wakefield Barometer classifies Phoenix's downtown and suburban regions as Leading Markets, with equally strong trailing six month performance and 24 month outlook.
Over the past several years, the Washington, D.C. office market emerged as one of the leading downtowns in the nation. Its 2005 barometer classification is as a Leading market, based on significant strength over the past six months and moderate growth over the next 24 months. Vacancies dipped to four-year lows of 7.2 percent overall at yearend. Rents in the Washington, D.C. area are expected to remain steady with the potential to decline slightly over the next two years.
Last year turned out to be a great year for Northern Virginia's office market. After an extraordinary amount of leasing activity during the past 12 months, overall absorption reached 4.9 million square feet, which was nearly double its 15-year annual average. The Cushman & Wakefield Barometer classifies Northern Virginia as a Leading market. Diminishing large blocks of available space in existing buildings coupled with an improving job market caused vacancies to decline. After peaking at 20.5% in the first quarter of 2003, overall vacancies have declined to 10.7%. Declining vacancies have resulted in substantial rent gains. Average asking rents jumped to their four-year highs of $30.13 per square foot for class-A space. Rents are expected to rise moderately over the next 24 months.
The New York City area markets are generally in solid shape. Midtown Manhattan, the economic driver for the entire region, and Midtown South, are both ranked in the Leading category. Midtown ($47.41) has the highest rental rate in the nation, at yearend. Both markets are expected to have rent increases over the next 24 months. Downtown Manhattan is leveling, and is also expected to see rent increases over the next 24 months
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