Office sector slow to recover, even as vacancy rates slide

October 01, 2006 |

Office construction is slowly recovering from the recession, significantly trailing the pace set by the retail and hotel markets. Building owners have recovered less than 25% of the rental rates they were commanding during the peak of the last building cycle.

While office vacancy rates have been declining for more than two years, they remain about six percentage points higher than in late 2000.

Growth in office space demand has modestly exceeded new office space supply for more than a year, and this gap will persist for at least another year. The peak level of office construction in this building cycle should be beyond 2008.

The key driver for space demand is office employment, and the two largest office-based industries—finance and professional and technical services—added 3% more employees in the last year and will continue to expand faster than other employers for at least another year.

Office rent increases are likely to pick up their pace when five-year leases, signed in 2001-02, expire in about a year—even with a national vacancy rate at 16.2%. Additional office space demand is more than 10 million sf per year in some markets, such as Washington, New York, and the greater Los Angeles area. Annual demand is about half that level in Atlanta, Dallas, Phoenix, and Boston. Other large office markets are showing markedly less growth; demand is low in Chicago, San Francisco, Houston, Denver, Philadelphia, and Seattle.

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