Office Market Forecast Projects Rental Rate Appreciation, Major Increases in Absorption

31 Mar, 2011, New York

Cushman & Wakefield today released its U.S. Office Market Forecast for 2011- 2013, projecting rental rate appreciation, major increases in absorption and vacancy declines over the next two years for Central Business District (CBD) and suburban markets.

"Employment levels are projected to grow significantly over the next three years, generating a large increase in demand and momentum in the U.S. office market," said Maria Sicola, executive managing director and head of Americas Research for Cushman & Wakefield.

CBD Forecast
With economic fundamentals improving steadily over the next three years, absorption is projected to increase significantly from the 2.2 million square feet recorded in 2010. While it is anticipated that a lower amount of square footage will be absorbed per employee than in prior recoveries, absorption is expected to increase to more than 8 million square feet in 2011, and rise to about 13.9 million square feet in 2012. Major metropolitan areas will see the strongest gains, with New York City, Washington, D.C., Seattle, Boston and Chicago alone accounting for nearly two-thirds of absorption over the next two years.

Vacancies are expected to decline in CBDs before the suburbs initially, though recovery should be more even by 2013, when the national CBD vacancy rate is predicted to hit the low 12.0 percent range.

While rental rates currently remain near bottom in most of the U.S., a lack of new supply and rising demand should increase rents for approximately half of CBDs this year, with nearly every market seeing rental rate increases by 2013. Those markets with relatively little - or no - new construction coming on line in the next three years will have the highest increases, including San Francisco, Midtown South Manhattan, Boston, Seattle, Salt Lake City and Washington, D.C.

Suburban Forecast
While the overall suburban vacancy rate is expected to decline in 2011, several areas will still experience weakness this year including Seattle, Oakland, Phoenix and Boston. As employment growth strengthens, 2012 and 2013 should bring improvement for nearly all suburban markets as demand resurfaces.

Overall absorption is expected to improve steadily over the next few years, with Southwest markets including Houston, Dallas, Denver, Phoenix and Salt Lake City leading in occupancy gains relative to inventory.

New construction remains historically low, and when delivered over the next three years, will only grow suburban inventories by 0.5 percent. Projects under construction in still relatively strong markets are likely to be substantially pre-leased, and those underway in markets with still-high vacancy rates should not have an adverse impact, as most are build-to-suit.

With demand growing, rental rates in the suburban markets are expected to increase, though not at the double-digit levels seen in previous upturns. Almost half of suburban markets will still see year-over-year rent declines, but by 2013 only five will be below 2010 levels (Miami, Orange County, Detroit, Kansas City and New Haven).

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