Office Market Recovery Is for Real

The U.S. office market absorbed an impressive 14.8 million square feet of space during the fourth quarter, more than double the amount absorbed in the previous quarter, according to a new research report on quarterly activity in the U.S. Office Market from Colliers International. As occupancy roundly improved, so too did investor sentiment as heavy demand for core assets in top markets like Washington, D.C. and Manhattan drove capitalization rates down into the low five percent range.

According to Colliers International’s Q4 2010 North America Office Highlights report, leasing fundamentals are snapping back noticeably as evidenced by the national vacancy rate which fell from 16.44 to 16.15 percent during the quarter. Continuing a trend that began with the previous quarter, Washington, D.C., Manhattan and San Francisco held onto their lead as the nation’s strongest office hubs on the basis of vacancy and rental rates. In San Francisco, nearly two million square feet of space was leased during the fourth quarter (up markedly from the historical average of 1.7 million square feet). And in Manhattan, the overall availability rate fell to 13 percent by the end of 2010, down from 13.3 percent at the end of the third quarter. What’s more, a handful of lagging office markets such as Dallas, Chicago and Denver also posted robust (and welcome) occupancy gains during the quarter.

Net absorption refers to the amount of office space occupied at the end of a period minus the amount occupied at the beginning of a period. It also takes into consideration any space that was vacated during the period.

Much of the credit for this robust and broad-based recovery can be attributed to a steady uptick in office-using job growth. But a dearth of new office projects also has further tightened market fundamentals. Only 3.8 million square feet of new office space was introduced to the national market in the fourth quarter, down from the 5.5 million square feet in total delivered that was to the market just one quarter prior.

“The national office market would appear to be in the midst of a full-fledged comeback,” said Dylan Taylor, chief executive officer for Colliers International in the U.S. “As the velocity of this recovery accelerates over the next few months, we would expect to see additional occupancy gains and increased rental rates throughout a growing number of key markets.”

“This rebound is for real, as we now know that the market spent the first few months of last year trying to find its footing,” said Ross Moore, chief economist at Colliers International. “From a leasing and investment sales perspective, end users and buyers came on strong to close out the year on a very optimistic note.”

Moore also noted that the performance gap between central business district (CBD) and suburban office market performance began to narrow during the fourth quarter. Roughly two-thirds of all fourth quarter leasing absorption occurred in suburban office markets—whereas only 46 percent of all occupancy gains for the third quarter were generated by suburban transactions. The gap between these two market types, however, remains formidable: Class A office vacancy within the national suburban office market registered 18.34 percent at the end of December, well above the Class A office vacancy rate for the national CBD market which notched 16.02 percent at the end of 2010.

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