Office Recovery Varies
Some markets leap forward, while others continue to face challenges.
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,”
For more on the national office market, read CIRE’s September/October cover story,
“Back to Business?”