Office vacancy rates declined or held steady in most major U.S. markets during 1Q 2013, according to preliminary data from CBRE Group, Inc.
Six of the 12 largest markets showed declines in office vacancy, led by Denver and San Francisco, while two markets remained stable. Industrial availability continued to decrease moderately in major U.S. markets, according to CBRE.
“Market fundamentals continue to improve as the economy slowly recovers and the employment picture brightens,” said Asieh Mansour, PhD, CBRE’s Head of Americas Research. “Although the economic rebound is tepid by historical standards, real estate markets are being helped by a dearth of new construction, which is allowing excess space to be steadily absorbed. The consolidating federal government sector, however, does provide a drag on the recovery in certain markets.”
>> Office
In the major U.S. office markets tracked by CBRE, Denver recorded the biggest drop in vacancy during 1Q, decreasing 60 basis points (bps). San Francisco had the second-biggest decrease, with a 40 bps decline. Both markets saw asking rates rise due to heightened leasing activity in combination with constrained supply. Washington, D.C., and New York registered the sharpest increases in vacancy, at 40 bps and 30 bps, respectively.
Decreased activity by the federal government and a cautious financial services sector continue to weigh on these markets. Rental rates for Class A space continued to trend higher and concessions remained stable or declined modestly in most markets. While speculative office construction is being contemplated in a few major markets, most developers are focused on build-to-suit projects, which are more readily financeable in today’s environment.
The office market in Metro Phoenix followed the national trend with a drop in vacancy of 20 bps. Rental rates remained stable with the exception of trophy assets, which continued to experience some rent growth. This is due to a lack of new product and a limited supply of available Class A space in highly sought-after submarkets. While market activity across the metro area has increased, only a slight decrease in the aggressive rent concessions of the past two years has been observed.
>> Industrial
During 1Q 2013, availability rates for major U.S. industrial markets continued to decrease moderately. At 60 bps, Boston and Miami had the largest decreases in availability rates compared with 4Q 2012. During 1Q 2013 rents were unchanged, but tenant concessions decreased, especially for Class A industrial buildings.
Demand for warehouse and distribution space remained high, particularly in New Jersey, Los Angeles and Denver. Industrial rents are approaching replacement-level costs, making development increasingly feasible. However, most construction activity remains build-to-suit, while speculative construction was largely confined to markets with shortages of large, contiguous blocks of warehouse and distribution space.
“Large blocks of contiguous warehouse/distribution space in key port markets and super-regional centers are in demand. Consolidation of the logistics firms and ecommerce trends are the key drivers of the bulk warehouse distribution space,” Mansour said.
The industrial availability rate in Metro Phoenix experienced a significant decline, falling 40 bps. Rents continued to trend upward, driven by the dwindling supply of available space and increased demand. This imbalance has also reduced the amount of rental rate concessions offered by landlords. New speculative construction is underway in the southwest and northwest distribution markets, but it will do little to fill the need for product in other segments of the market.
