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Thursday, July 05, 2007

"Soaring" Office Rents

by Calculated Risk on 7/05/2007 02:06:00 PM

From the WSJ: Soaring Rents Pinch Businesses Across the U.S.

Nationwide, effective rents on office properties -- the amount tenants pay after concessions -- jumped an average of 3.1% during this year's second quarter, up from gains of 2.8% in the first quarter and 2.1% in the year-earlier period, according to a report scheduled for release today by real-estate research firm Reis Inc.

That was the sharpest quarterly increase since the third quarter of 2000 ...
Just a few months ago, CB Richard Ellis reported that vacancy rates were rising:
The U.S. office vacancy rate rose in the first quarter, according to CB Richard Ellis. ... The rate was 12.8 percent in the first quarter, up from 12.6 percent the previous quarter.
And, in April, the WSJ reported that office absorption was "sluggish". According to the WSJ, Q1 office space absorption rate was about 8 to 10 million square feet per quarter, but "... developers will open 76 million square feet of new office space by the end of this year."

But today's report suggests absorption picked up in Q2:
Meanwhile, demand for office space has been growing. Net absorption -- a measure of the space taken up by commercial tenants -- increased markedly during the latest quarter, a sign that the economy is producing more office jobs, says Sam Chandan, chief economist for Reis. Nationwide, the office-vacancy rate, at 12.7%, is the lowest since the third quarter of 2001.
One of the keys to economic growth in the second half of '07 is investment in non-residential structures. It is possible that the big investment slump in the early '00s has left many markets with too little supply of commercial and office buildings (and other non-residential structures). So, even though the typical pattern is for non-residential investment to follow residential investment by 5 or so quarters, it is possible that investment in non-residential structures will decouple (at least somewhat) from the typical pattern - and remain strong throughout '07.