Monday, January 06, 2014

Reis: Office Vacancy Rate unchanged in Q4 at 16.9%

by Bill McBride on 1/06/2014 08:40:00 AM

Reis released their Q4 2013 Office Vacancy survey this morning. Reis reported that the office vacancy rate was unchanged at 16.9% in Q4. This is down from 17.1% in Q4 2012, and down from the cycle peak of 17.6%.

There has been a pick up in demand, but construction has also increased - so the vacancy rate was unchanged.

From Reis Senior Economist Ryan Severino:

The national vacancy rate was unchanged during the fourth quarter at 16.9%. This is slightly worse than the performance from last quarter, but not out of line with the performance that has persisted since the office market began to recover in mid‐2011. Not since the third quarter of 2007 has the national vacancy rate declined by more than 10 basis points. For 2013, the vacancy rate fell by just 20 basis points, 10 basis points worse than the market's performance in 2012. National vacancies remain elevated at 440 basis points above the sector's cyclical low, recorded in the third quarter of 2007 before the recession began that December. Supply and demand have remained largely in balance during this recovery, accounting for the slow pace of vacancy compression.
emphasis added
On new construction:
Occupied stock increased by 8.521 million SF in the fourth quarter. This is an increase from the 7.641 million SF that were absorbed during the third quarter. However, this was largely due to a jump in completions. For the quarter, 9.126 million SF were completed, up from last quarter's 6.301 million SF. This dynamic between net absorption and construction held throughout the year. For 2013, quarterly net absorption averaged 7.042 million SF, a 67% increase from 2012's average of 4.225 million SF. For construction, the quarterly average was 6.471 million SF, a 108% increase from 2012's average of 3.110. So while demand certainly increased during 2013, it did so more or less in lockstep with the increase in construction. This clearly intimates the ongoing use of pre‐leasing that is being required by lenders of construction and development financing. Moreover, and possibly more meaningfully for the office market, it also indicates that tenants looking for space clearly preferred newly completed inventory in 2013.
On rents:
Asking and effective rents both grew by 0.7% during the fourth quarter. This a reversal of the trend that we have observed in recent quarters with rent growth slowing gradually. Asking and effective rents have now risen for thirteen consecutive quarters. During 2013 asking rent grew by 2.1% while effective rent grew by 2.2%. This was somewhat better than 2012's performance when asking rents grew by 1.8% while effective rents grew by 2.0%.
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 was unchanged at 16.9% in Q4, and was down from 17.1% in Q4 2012. The vacancy rate peaked in this cycle at 17.6% in Q3 and Q4 2010, and Q1 2011.

Office vacancy data courtesy of Reis.