Office market stagnant despite dip in vacancies

The national office vacancy rate dropped 0.6% in the winter quarter, to 15.4%. Developers did not react immediately to this large decline as they boosted office construction spending only 1.3% (barely exceeding inflation) during the quarter, according to CB Richard Ellis.

Office vacancy rates at the beginning of spring remained too high in most markets to support a pickup in speculative building. However, strong absorption of vacant space is anticipated in the spring, which will bring many markets to the threshold of the expected surge in office construction. As a result, office construction spending is forecast to rise 3% in the spring quarter and 5% in the summer quarter, and is expected to continue to expand at this pace well into next year.

The growth in office construction spending will be supported by rising employment in office-based industries, already up 1.5% in the last year. This will raise net rents and, consequently, office-building asset values; thus, developers can construct a new building for less than it would cost to buy an old one.

Office vacancy rates are lowest in the New York and Los Angeles areas. Both are international business centers with a relatively large share of trade-related jobs. The trade sector of the U.S. economy has been expanding nearly twice as fast as the domestic sector for a decade.

The highest vacancy rates are in the Midwest, especially in the motor vehicle manufacturing region. Detroit, Cleveland, and Columbus, Ohio, have more than 20% of space vacant. In recent years, this region has lost market share to the South, where most of the new, foreign-owned automobile plants have located. More recently, auto and light truck sales have been stagnant for almost a year following a surge in sales prompted by 0% loan rates offered by many dealers.

Office vacancy rates (2005 Q1 vacancy rate %)