Office Leasing Uptick Cause for Optimism

The U.S. office market is roaring back to life. The national vacancy rate for all classes of space registered 15.6% at the end of June, down from 16.4% in the previous quarter and the steepest quarterly decline in five years. “It’s pretty remarkable how well the office market is moving along,” says Bob Bach, director of national research at North Brook, Ill.-based Grubb & Ellis.

To Bach, this sustained improvement reinforces that the much debated office recovery isn’t just “a flash in the pan.” He also believes that it puts to rest any argument that offshoring and telecommuting have derailed office demand. “Despite that argument combined with fairly weak job creation, we’re still seeing reasonably strong office demand. And it turns out we are farther along in this recovery than we originally thought,” says Bach.

Indeed, net absorption rose to 24.8 million sq. ft. during the second quarter. Quarterly net absorption hasn’t hit that level since the last gasp of the dot-com bubble in 2000. Meanwhile, net absorption through the first six months of 2005 registered 40.8 million sq. ft., or more than double the 18.1 million sq. ft. absorbed over the same period last year.

That’s all the more impressive, given highly uneven job gains over the past 12 months. What’s easy to forget, however, is that the labor market has produced roughly 3.7 million new payroll jobs since May 2003 — and a full 1.2 million of those were so-called “office-using” jobs, such as financial activities and professional and business services.

Locally, Grubb & Ellis data shows that leasing demand has been strongest in Washington, D.C. and its Virginia and Maryland suburbs. New York and Los Angeles, where overall vacancy hovers around 12%, round out that list. Reno, Nev., Long Island, N.Y. and Des Moines, Iowa, were the only three markets that posted negative absorption during the second quarter. Dallas-Fort Worth posted the nation’s highest metro vacancy at 23.6% by the end of June.

Grubb & Ellis isn’t alone in tracking a pronounced office leasing recovery. Manhattan-based real estate research firm Reis, Inc. also finds that the second quarter brought strong absorption and leasing activity. Though the Reis data is slightly different than the Grubb & Ellis numbers, both are moving in the same direction. According to Reis, there was 19.6 million sq. ft. of absorption during the second quarter, up from only 10.3 million sq. ft. in the first quarter.

“There is no question that the office market’s momentum continues toward recovery, and that some metropolitan areas are demonstrating unmistakable signs of strength in recent quarters,” says Reis CEO Lloyd Lynford. “Particularly encouraging to investors must be the near doubling of the pace of absorption over the previous quarter.”

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