Mixed Year in US Office Market

Absorption down by 20%, but Rents Increased and Vacancies held their own

With the economy coming closer to a recession at the end of 2007 by way of the U.S. housing market, commercial real estate has only been modestly impacted.

Following the ‘tech bubble’ bust in 2003, the national office market started its current up cycle and, since 2004, absorption across all U.S. markets tracked by CoStar averaged 111.1 million sq. ft. per year.

Until 2007 when the U.S. office market finished 19% lower than the previous four-year average with 90 million sq. ft. which could indicate the market is trending back into the downward slope of its cycle.

2007 product net absorption by class:

·         Class A -   >8% the four-year average

·         Class B -   >28% the four-year average

·         Class B -   >2.23 million sq. ft. from 2006

Not a pretty picture, however, the net absorption of the U.S. central business districts cam up nearly flush with the four-year average.

Overall, the mid-tier markets who achieved the slowest recovery from the past office market downturn did the best in 2007. In the Ohio markets, for example, the Cincinnati, Dayton, Cleveland and Columbus net office space absorption were well over the four-year average.

Dayton in particular who has been averaging a negative net absorption for the past four years announced more than 400,000 sq. ft absorption last year. Columbus doubled its four-year average, and Pittsburgh achieved a 66% increase over their four-year average.

Over in Houston, a 17% net absorption increase over their four-year average was posted at 5.4 million sq. ft. – which was the second highest net absorption in the U.S. in 2007 – eclipsed only by New York’s 6.2 million sq. ft. (even though New York’s 2007 net absorption was 16% below their four-year average).

Los Angeles cam in at more than 90% below their four-year average of 5.4 million sq. ft. and in neighboring Orange County, vacancy rate plummeted form 7.1% to 11.2%.

South Florida’s office markets also saw demand dramatically decline during 2007 with their posted 316,000 sq. ft. net absorption. Yet Palm Beach County received the largest hit with a negative absorption rate of 845,000 sq. ft. On the brighter side, Miami-Dade and Broward counties reported positive net absorption, but their gain was not enough to make up the losses in surrounding South Florida counties.

The last decline in net absorption the office market experienced occurred in 2000 which saw a drop of 27% from the previous year; followed by a year of negative net absorption in 2001.

In an unusual twist, the weak office market has had little effe4ct on the U.S. office vacancy rate which has held steadily at 11% for the past year and a half. This can largely be accredited to the delivery of office space remaining steady, averaging about 25 million sq. ft. per quarter.

2007 Vacancy Rate by class:

·         Class A -   11.6%

·         Class B -   12.2%

At the end of the year, 2007 saw an average asking rental rate for all available classes at $24.04 per sq. ft. a year, which was up 6% from the beginning of the year.

Sales activity for 2007 increased form 2006 and, for the first nine months, the office market saw 2.207 sales transactions with a total sales volume of over $73 billion, and a price per sq. ft. averaging at $264.

It should be noted that even with a strong first three quarters, the last quarter of 2007 saw prices on the downward trend at $241 per sq. ft.

Finally, CAP rates finished off 207 .02% lower than in 2006.