Office Recovery Varies

Some markets leap forward, while others continue to face challenges.

The national office market has officially started its recovery: rents and vacancies have not only stabilized, but are even turning positive. But not every area of the country has received that memo. The rate of recovery varies widely by state, city, and even individual submarket.

There continues to be a wide disparity between markets that are already on the road to recovery and those that have yet to gain a foothold. For example, the best performing market over the past year in terms of effective rents was San Francisco, which saw a 6 percent improvement, according to Reis. At the other end of the spectrum was Cleveland, which ranked last among 79 cities with effective rents that dropped a further 1.8 percent in the past year.

“It really runs the gamut between markets that are starting to see some material increases and markets that are still seeing fairly significant decreases,” says Ryan Severino, a senior economist at Reis.

That being said, there clearly is a broader trend of improvement. Occupancies have improved or stayed flat in 42 out of 79 metropolitan areas over the 12-month period ending in the second quarter, according to Reis. Effective rents during the same period increased in 38 out of 79 markets that Reis tracks.

Markets such as Raleigh-Durham are reveling in the release of some pent-up demand for office space. “We saw businesses that were unable or unwilling to make future decisions over the last couple of years,” says Gregory T. Payne, CCIM, a broker at Pickett-Sprouse Real Estate in Durham, N.C. Companies were not hiring, because they were afraid they would have to lay workers off again in six or nine months after they had trained them. So instead of getting a new lease, companies were more apt to go month-to-month.

“It is not going gangbusters yet, but we are finally seeing more tenants wanting to make a new commitment, at least for the next couple of years, and maybe expand after that –- especially after standing pat for the last several years,” Payne says.

Atlanta, like many secondary and tertiary markets across the U.S., has hit bottom in terms of employment. However, while most of the shakeout in terms of job losses has passed, the metro has yet to see any significant improvement in job growth. “I don’t think anyone can say when we are going to see sustainable job growth,” says Andy Sumlin, CCIM, director of project leasing at Barry Real Estate Cos. in Atlanta. “But until then, I think it is just more of the same, because all we are doing is trading tenants –- whether that is among competitors or between different office product type as the flight to quality continues.”

Many cities are even experiencing a growing gap between downtown and suburban space. To some degree, that is to be expected due to the density, but it also reflects the flight to quality in many metros. Tenants are taking advantage of values and the opportunities to trade up on locations and quality of space. “The moral of the story is that it is the CBD areas that are driving the overall performance in the office market right now,” Severino says.

For more on the national office market, read CIRE’s September/October cover story, “Back to Business?

Beth Mattson-Teig

Beth Mattson-Teig is a business writer based in Minneapolis.


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