Office vacancy rate down from recession peak

The office vacancy rate fell 0.2% to 16.6% in the second quarter, according to the CB Richard Ellis survey. West Coast cities and Charlotte, N.C., had the most improvement while the largest increases in vacancy rates occurred in the New York-Philadelphia corridor, Cleveland, and Detroit.

Nationally, suburban buildings averaged an 18% vacancy rate, well above the 14% rate for downtown buildings. The national vacancy rate will continue to ease lower into next year and then decline more quickly into 2006.

Across all markets, net absorption strengthened during the quarter, especially in the suburbs, resulting in stable to slightly rising rents. Office construction starts were steady at a depressed pace that will likely be the lowest of this building cycle. So the 4% rise in office spending in the second quarter was due to materials cost inflation and renovations to lease existing space rather than work on new buildings.

The country's two largest markets, Manhattan and Washington, D.C., have the lowest vacancy rates. The relatively tight markets extend to the New York suburbs and down to Baltimore. In Manhattan, an expanding financial market and space, which was destroyed in 2001, keep vacancies low. Hiring by government contractors, nonprofit groups, and technology industries has provided the growing demand for space in D.C. The other two low-vacancy centers are San Diego, with a stable military and defense contractor economy, and Ventura County, which is attracting jobs fleeing north from Los Angeles.

The highest vacancy rates are in manufacturing and administrative centers in the mid-section of the U.S. Dallas and Atlanta were over built at the end of the last business expansion. Space absorption in Detroit, Columbus, Ohio, and Kansas City, Mo., is being restrained by government layoffs and manufacturing outsourcing.