Updated Office Market Report

A slow decline in US office vacancy driven by improved job growth is in the forecast for 2011, says CBRE Econometric Advisors. By year’s end, it’s expected to fall to an average of 16.1% from its peak of 16.7% at the end of 2010’s second quarter, reaching 15% by the end of 2012.

Not surprisingly, CBRE-EA doesn’t expect the recovery to occur at the same pace across all regions. “You have a trifurcation of the markets” when it comes to improving office fundamentals, CBRE-EA’s Arthur Jones tells GlobeSt.com.

In gateway cities such as New York City, Boston, Washington, DC and San Francisco, institutional investment has already picked up, as has tenant demand. As a result, “vacancies in those markets have come down somewhat from their cyclical peaks,” says Jones, Boston-based senior economist with CBRE-EA.

In New York and San Francisco in particular, “there’s not a lot of space coming onto the market, so any new demand you see is eating away at the vacancy rate,” Jones says. Even in the leading office markets, though, tenants have been taking advantage of pricing opportunities to trade up on their spaces, CBRE-EA says.

Aside from San Francisco, most of the bellwether markets are located on the East Coast. “There’s kind of a wave moving from east to west,” he explains.

The second class of market is what Jones terms “housing correction markets.” Markets such as Phoenix, Orange County in California and the Florida cities of Tampa and Miami are starting to see job growth, “but the vacancy rate in those markets is between 20% and 25%.” That’s well above the norm for those cities, Jones says, in contrast to Dallas, where overbuilding has kept the vacancy rate in that ballpark for the past several years.

The housing-correction cities, he says, have a way to go before declining vacancy puts any upward pressure on rents. “Landlords in those markets aren’t going to have any pricing power for the next year or two,” says Jones.

“Everything in between” comprises the third segment. In those markets, says Jones, “They’re looking to transition from a correction to recovery within the next year.” This would go for “middling markets” such as Minneapolis or Indianapolis, cities that “haven’t done horribly but haven’t done great, and they’re just waiting for the rising tide that lifts all boats.”

Markets that have been hotbeds of distress in the past couple of years, notably Las Vegas and Detroit, will be “the last of the last to recover.” In the case of Detroit, however, Jones notes that vacancy has declined steadily over the past two decades, and says it would require “something exogenous” to current market conditions in order for a strong recovery to take root.

CBRE-EA’s analysis also projects rent stabilization this year. The analysis notes that the rent correction eased in ’10, as net effective rents declined by a “modest” 4.5% nationally.

A few markets are poised to come back stronger than before. Jones cites Pittsburgh as a case in point. “They’ve started to see pretty good improvement in their fundamentals over the past year, and what’s driving that is that Pittsburgh doesn’t see a lot of development,” he says, adding that the city was among a handful to actually see positive rent growth in the past 12 months. (credit p. bubny globe st)

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