The national office vacancy rate increased two points last year to 16.8% by the end of 2008, according to Property & Portfolio Research. Office rental rates fell 2% last year, and office building asset values tumbled by at least 10%; some estimates indicate a decline as high as 20%.
In most markets it is now cheaper to buy and build, but office building purchases are sharply lower, owing to financing difficulties and layoffs in office-based industries over the last few months.
The office vacancy rate will continue rising—at least two more points by mid-2010—before the economy levels off and significant layoffs in office-based industries end, halting the downward slide in the office market.
The lowest office vacancy rates are in the New York City and Washington, D.C. markets, as well as other metro areas where home prices are more stable. The tight office market in New York is the result of rapid growth (until last fall) in the city’s large securities market. Now, the financial collapse will raise the New York office vacancy rate to near 20% by late next year.
Federal jobs and lobbying activities support the strong Washington, D.C., office market. Additionally, new jobs spurred by the massive federal stimulus package will largely offset any impact the recession has on Washington’s office vacancy rates.
Office construction spending has declined 9% since September, although a portion of the decline is due to lower construction materials costs. The decline is 16% for private projects, and an additional 3-5% decline is expected. Spending on public projects increased 3%.
The value of office construction starts is down 15% from the 2008 monthly average through February, which is primarily due to delays or cancellations of large office projects. Office starts will decline for most of 2009.
Highest Office Vacancy Rates — 2008 Q4
Riverside, Calif. 24.6
Palm Beach, Fla. 22.5
North Central N.J. 21.3
Tampa, Fla. 21.3
Lowest Office Vacancy Rates — 2008 Q4
Washington, D.C. 12.6
New York City 12.8
Charlotte, N.C. 13.6
Salt Lake City 13.9
Source: Property & Portfolio Research