by Bill McBride on 7/01/2015 01:45:00 PM
Wednesday, July 01, 2015
Reis released their Q2 2015 Office Vacancy survey this morning. Reis reported that the office vacancy rate was unchanged compared to Q1 at 16.6%. This is down from 16.9% in Q2 2014, and down from the cycle peak of 17.6%.
The national vacancy rate remained unchanged at 16.6% during the second quarter. Vacancy compression stalled this quarter because net absorption was slightly outpaced by new construction. This appears to be just a pause as vacancy compression has been more consistent in recent quarters. With the economy and labor market continuing to improve, demand should outpace new construction by a wider margin over time, resulting in more rapid vacancy compression than has occurred up to this point.Click on graph for larger image.
Occupied stock increased by 8.154 million square feet during the second quarter. This was an increase versus last quarter. However, more heartening data can be found in the year‐to‐date net absorption figure of 15.607 million SF. This is a 22% increase over 2014’s year‐to‐date absorption and the best midyear performance since before the recession. This provides the strongest evidence yet that greater demand is returning to the office market. Although the pace of improvement has been slower than in previous recoveries, it appears that this recovery is finally gaining momentum. We expect this to continue going forward as ongoing increases in hiring translate into greater space needs for office users.
New construction of 8.303 million SF is a bounce back from the first quarter. Most of the new inventory coming online is preleased. Although it is slowly increasing, there remains little new purely speculative development in the market. This will likely persist until vacancy is far lower – with such an elevated vacancy rate, investors and lenders remain cautious about green lighting construction that does not have a pre‐leased component. When this stringent pre‐leasing prerequisite is finally dropped it will be a clear sign to the market that the recovery is in full swing. However, we have not yet arrived at that juncture.
Asking and effective rents both grew by 0.7% during the second quarter, marking the nineteenth consecutive quarter of asking and effective rent growth. These growth rates are a decrease from last quarter when both grew by roughly 1.0%. As we mentioned last quarter, annualized rent growth of closer to 4%, which was observed during the two previous quarters, was going to be difficult to maintain in such a high‐vacancy environment.
This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual).
Reis reported the vacancy rate was at 16.6% in Q2.
Office vacancy data courtesy of Reis.
Posted by Bill McBride on 7/01/2015 01:45:00 PM