Survey finds office vacancy rates falling

Continuing its recent upward trajectory, the national office market posted a very upbeat third quarter, according to a report by Colliers International, the global real estate services firm. In 2005, July through September absorption totaled 36.2 million square feet (msf) — compared with 33.9 msf during the second quarter of 2005 and 26.2 msf during the year-ago quarter. Indeed, third quarter absorption almost doubled Colliers' projections of 20 msf per quarter, made at the outset of the year.

In addition, after adjusting for the effects of Hurricane Katrina, job creation remained remarkably strong in the third quarter. Because job creation has a direct effect on the health of the office market, it represents another major factor contributing to the strong office absorption experienced during Q3.

Third quarter office vacancy rates measured 14.2 percent this year, versus 14.7 percent during the second quarter and 15.7 percent during the third quarter of 2004 period. Additionally, vacancies are now significantly below the cycle high of 16.4 percent registered at the end of 2003.

In line with this vacancy reduction, rents increased during the third quarter of 2005, with national averages showing healthy up-ticks. Downtown asking rents increased 3.2 percent, reaching an average of $35.84 PSF (per square foot), while suburban rents increased 2 percent to $24.35 PSF. Such sustained quarterly increases were not expected to appear until 2006.

"The United States office market is surprising almost everybody with robust growth and rapidly declining vacancies," remarked Ross Moore, vice president and director of Research at Colliers USA. "Unfortunately, however, this trend is almost certain to end, as the business sector appears poised for a slowdown, in the face of rising interest rates and escalating energy costs."

New construction totaled 8.8 msf during the Q3 2005 period, versus 12.6 msf during the second quarter. To date this year, office construction completions totaled 31.8 msf, versus the 31.7 msf completed by Q3 2004. Another 66.1 msf of office space is currently under construction, and anticipated to be completed in the next 18 months. Indeed, only a few office markets forecast a slowdown during the balance of 2005, with most predicting demand will stay at current levels or higher.

Ten Largest Office Markets (ranked by vacancy rate in the third quarter of 2005):

Downtown: National Average 13.8%

Washington, DC: 7.4%

Midtown South Manhattan 9.4%

Midtown Manhattan 9.4%

Philadelphia 10.7%

Downtown Manhattan 12.0%

Atlanta 12.4%

San Francisco 13.7%

Boston 15.5%

Chicago 19.3%

Houston 19.5%

Suburban: National Average 14.4%

Northern Virginia 11.4%

Northern NJ 11.8%

Central NJ 12.7%

Los Angeles and Ventura Counties 12.8%

Atlanta 14.8%

Houston 14.8%

Philadelphia 15.5%

Detroit 15.6%

Dallas-Fort Worth 17.5%

Chicago 21.0%

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