U.S. Office Vacancy Rate Rises to 13.7% at Midyear
29 Jul, 2009, New York
Cushman & Wakefield today released second quarter 2009 statistics for the U.S. office property market that show an increase in the central business district (CBD) vacancy rate to 13.7 percent from 12.5 percent at the end of March.
The vacancy rate has risen to its highest level since the second quarter of 2005, when it was 13.7 percent, but is still below its decade high of 15.5 percent, which it reached in the second and third quarters of 2003. It has risen 3.5 percentage points since this time last year and 4.0 percentage points since the start of the recession in December 2007.
The vacancy rate increase during the second quarter coincided with a 19 percent decline in overall office leasing activity, which totaled 8.6 million square feet compared to 10.6 million square feet in the first quarter of 2009. In addition to a pullback in leasing activity, two additional factors that contributed to the rise in vacancy were new construction completions year-to-date and a continued increase in available sublease space.
New CBD construction completions in the second quarter totaled 3.2 million square feet, on top of 3.3 million square feet that were completed in the first quarter. More than two-thirds of that space is vacant as of the end of June. The sublease vacancy rate, which tracks excess space available from tenants, rose to 2.3 percent in June from 2.1 percent at the end of March.
"With unemployment at a 26-year high and nearing 10 percent, that inevitably translates into reduced demand for available office space, which has been reflected in the vacancy rate, leasing activity and absorption statistics year-to-date," said Maria Sicola, executive managing director and head of Americas Research for Cushman & Wakefield. "One bright spot is that the rate of negative absorption started to slow in the second quarter, and leasing activity picked up in June, two trends that seem to indicate that tenants are beginning to act on opportunities to lock-in value in the current environment in advance of a rebound."
The absorption rate, a measure which indicates the net change in occupied space, was negative 10.9 million square feet for the second quarter, below the rate of negative absorption recorded in the first quarter of 14.0 million square feet. Although the rate of negative absorption slowed in the second quarter, the total absorption rate for the first six months of 2009 totaled negative 24.9 million square feet, which compares to negative 4.2 million square feet for the first six months of 2008.
Economic conditions and market fundamentals contributed to a 3.2 percent decline in overall average asking rents, down to $38.25 per square foot from $39.50 in the first quarter. Average rents, not including concessions, are off 6.6 percent from a high of $40.95 in the third quarter of 2008.
Despite lower demand, average asking rental rates continued to climb in eight cities, down from 14 cities that experienced rental rate increases in the first quarter. Asking rental-rate changes during the quarter ranged from the highest increase of $3.31 per square foot in Silicon Valley, Calif., to the largest decline of $6.21 in Boston.
According to Ms. Sicola, recent rental rate increases are "primarily attributable to the delivery of new construction," which tends to raise the overall average asking price for available space. "Despite statistical increases, effective rents have been significantly reduced across the board," Ms. Sicola said.
Five markets experienced vacancy rate declines or remained unchanged quarter-over-quarter. These included Dallas, the only U.S. market to experience consecutive quarterly vacancy rate declines, to 27.1 percent from 27.2 percent at the end of the first quarter; San Diego, which declined to 14.2 percent from 14.7 percent; San Francisco, which declined to 13.8 percent from 14.0 percent; Houston, which declined to 12.8 percent from 13.0 percent; and Hartford, Conn., which remained unchanged at 22.0 percent.
The top five lowest vacancy rates in the nation at the end of the second quarter were recorded in New Haven, Conn., at 10.0 percent; New York City at 10.5 percent; Portland, Ore., at 10.9 percent; Philadelphia at 11.6 percent; and Boston and Washington, D.C., each at 11.7 percent.
Considering New York City?s Downtown and Midtown South submarkets independent from Midtown, the two submarkets were tied for the lowest vacancy rate in the nation at the end of the second quarter, of 8.7 percent, up from 8.1 percent at the end of March. Downtown and Midtown South, with 88 million square feet and 65 million square feet of office space, respectively, are the fourth and fifth largest office markets in the nation behind Midtown Manhattan, Chicago, and Washington, D.C.
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