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Tuesday, April 02, 2013

Reis: Office Vacancy Rate declines slightly in Q1 to 17.0%

by Calculated Risk on 4/02/2013 08:47:00 AM

Reis released their Q1 2013 Office Vacancy survey this morning. Reis reported that the office vacancy rate declined slightly to 17.0% from 17.1% in Q4 2012.

From Reis VP of Research Victor Calanog:

Vacancy declined by 10 basis points during the first quarter to 17.0%. This is exactly the same pace as the 10 basis point decline recorded in the prior quarter, and roughly the same pace as any improvements in occupancy recorded throughout 2012 (when vacancies fell by a scant 30 basis points over four quarters, from 17.4% to 17.1%). If demand for office space were more robust, vacancies would be declining at a much faster pace since supply additions are virtually nil.
emphasis added
On new construction:
Occupied stock rose by only 4.020 million SF in the first quarter, roughly the same anemic pace as the prior quarter. ... Given high vacancy rates and lenders who are still skittish about committing relatively large amounts for construction and development financing, it is hard to justify breaking ground on new office projects. Only 1.578 million SF of new office space came online in the first quarter of 2013, the lowest quarterly figure for new completions since Reis began publishing quarterly data in 1999. If inventory growth for all of 2013 continued to grow at this quarter’s rate we will set a new historic low for construction activity (the previous low is 7 million SF in 1994, the nadir following the Savings and Loan crisis).
On rents:
Asking and effective rents both grew by 0.7% during the first quarter. ... Asking and effective rents have now risen for ten consecutive quarters. However, given the meager increases over the last two and a half years, rent levels are still anchored at benchmarks last observed in late 2007. National effective rents, for example, are still about 7.7% below peak levels observed in the second quarter of 2008, right before the fall of Lehman Brothers pushed the US recession into overdrive.
Office Vacancy Rate Click on graph for larger image.

This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual).

Reis reported the vacancy rate declined in Q1 to 17.0%, down slightly from 17.1% in Q4, and down from 17.3% in Q1 2012. The vacancy rate peaked in this cycle at 17.6% in Q3 and Q4 2010, and Q1 2011.

As Calanog noted, net absorption was still positive, even though demand for office space was low - because there is record low new construction. This remains a sluggish recovery for office space, and new construction will stay low until the vacancy rate falls much further.

Office vacancy data courtesy of Reis.