Office Starts Soar as Vacancy Rates Plummet

The national office vacancy rate declined 0.2% to 16.4% in the first quarter, according to Property & Portfolio Research, with new demand for office space outgrowing supply by a 3:2 ratio.The value of private office construction starts jumped 26% compared with the same quarter last year, based on monthly project monitoring by Reed Construction Data. Even larger year-to-year gains were reported for the value of projects moving into the planning and bid stages. Similarly, starts nearly doubled for government offices.

Office construction spending grew last fall after a one year pause; a 40% jump in spending is expected during 2006-07.

Atlanta and Dallas are still reasonably attractive office development markets in spite of their high vacancy rates. The cities rank fourth and fifth among all metro areas in square feet absorbed in the last quarter, and they boast fairly stable rents. New Orleans, which has very low rents that continue to fall, had no new supply in the last quarter and had minimal absorption of the existing surplus space early in 2006. New York and Washington, D.C., have the largest square footage increases in both demand and supply—but not enough new supply to raise vacancy rates. Office demand is expanding considerably faster then office supply in both Orange Country, Calif., and San Diego. Detroit is the only major city with a clearly rising vacancy rate. The toll on the Detroit economy from the exodus of the motor vehicle industry is certain to get worse.

U.S. cities with the highest and lowest office vacancy rates
(2006 Q1 vacancy rate %)