Office vacancy rates continue to fall

The national office vacancy rate fell to 15.3% in the final quarter of 2006, according to Property & Portfolio Research. The vacancy rate declined 0.2% from the previous quarter and 1.1% from the same period a year earlier. Office vacancy rates are expected to stay at about this level for several years because new office space doubled in the last two years and has now caught up to demand.

Job site construction spending in December was 18% higher than the same period a year earlier, and this pace is expected to continue through 2008. Reed Construction Data reported a 62% surge in December office project starts compared to the same period a year earlier. The value of 2006 office starts was up 13.2% from 2005. Office starts are forecast to keep rising 3-5% more than project cost increases through 2008.

Cities leading all markets in office space demand: Washington, D.C., Houston, New York, Phoenix, Dallas, and Chicago. Demand for office space is well above normal in smaller markets such as Austin, Baltimore, New Orleans, Minneapolis, Denver, Orlando, San Antonio, and San Francisco. In markets with high vacancy rates, such as Dallas and Boston, occupancy is improving. The situation is worsening in Detroit and Columbus, Ohio. In markets with low vacancy rates, such as Salt Lake City, occupancy is still improving, but in Riverside, Calif., the situation is worsening because of recent overbuilding.

U.S. cities with the highest and lowest office vacancy rates (2006 Q4 vacancy rate %)