"Conditions will be similar to 2005, as the nation's economy continues to expand," said Robert Bach, National Director, Market Analysis for Grubb & Ellis. Bach cautions, "there are imbalances in the economy that could slow growth as early as the second half of 2006 or even bring the expansion cycle to an early conclusion."
The report states that the office market is in a classic recovery cycle featuring strong demand, low construction, elevated but falling vacancy rates and firming rental rates. The office market will benefit from 2 million net new jobs expected in 2006, about 25 percent of which will be located in office buildings. New supply totaling 25 million square feet will fall far short of net absorption totaling 80 million square feet, which will reduce the vacancy rate to 12.8 percent by year end, down from 14.5 percent at year-end 2005. The average asking rental rate should rise 5 percent in CBD markets and 6 percent in the suburbs.
An increasing number of markets will move from the recovery cycle to the expansion cycle, where rental rates are high enough to justify new construction.
According to Bach, the greatest risk to the ongoing leasing recovery and imminent expansion cycle is not in the office market itself but in the broader economy, should expansion falter due to rising inflation and interest rates, retrenchment in the housing market or another imbalance.
For more information, see Grub&Ellis.
