office recovery stays slow, steady wsj.com
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COMMERCIAL REAL ESTATE July 8, 2013, 12:04 a.m. ET
Office Recovery Stays Slow, Steady
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By ELIOT BROWN
The U.S. office market continued its slow-but-steady recovery in the secondquarter, as employers took on additional space at a modestly improved pacecompared with recent anemic levels.
The amount of office space occupied by employers increased by 7.2 million squarefeet, or 0.2% of the total occupied stock, during the quarter, according to real-estateresearch service Reis Inc. That was the biggest increase since the economy beganslowing in 2007.
But the pickup still was below levels seen in more typical periods of economicgrowth. During such times, the volume of occupied space can increase some 10million to 20 million square feet per quarter. In contrast, employers have generallytaken on between three million and five million square feet of additional space perquarter since the market began improving in 2011.
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Office rents in San Francisco rose 7% in the past 12 months. Shown, a view of the downtown skyline inApril.
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Without faster growth, the office-vacancy rate is likely to continue to stay high—andrents relatively low. In the second quarter, the overall U.S. vacancy rate stayed flatat 17%, down from a postrecession peak of 17.6% reached in mid-2010.
Rents sought by landlords ticked up to $28.78 per square foot in the secondquarter, from $28.66 per square foot in the first quarter and $28.18 one year earlier,according to Reis, which tracks 79 metropolitan areas.
"We're just not seeing enough job growth," says Ryan Severino, an economist atReis.
The bright spots are cities with strong technology or energy markets. Expandingtech and natural-gas companies are seeking more office space to accommodatetheir growing headcounts.
The fastest rent increase over the past 12 months has been in the San Franciscoarea, followed by the San Jose, Calif., area—which includes Silicon Valley—andNew York, Houston and Dallas. Rents sought by landlords rose by 7% in SanFrancisco and 4.6% in San Jose.
That comes even as landlords and brokers in San Francisco say technologycompanies have taken their foot off the gas pedal recently, with the pace of newleases so far this year slowing from 2012, when companies like business softwarecompany Salesforce.com CRM -0.65% leased hundreds of thousands of additionalsquare feet. In San Francisco, rents paid by tenants increased 1.2% during thesecond quarter, down from a 1.7% increase in the first three months of the year,Reis said.
Still, real-estate professionals aren't concerned. The market "feels steady andstrong, and healthy," said J.D. Lumpkin, a San Francisco-based commercialleasing broker at Cushman & Wakefield Inc. "There's still a lot of great companiesbeing created in San Francisco that are growing and driving demand."
Technology companies also have aided markets outside of the Bay Area. In NewYork City, for example, expansion by the tech sector is making up for sluggishgrowth in the financial- services industry.
Just two years ago, Facebook Inc. FB +2.27% moved its New York outpost into anew 40,000-square-foot office at 335 Madison Avenue in Midtown. But space hasgrown tight, and in June the company announced plans to move to a 100,000-square-foot space at 770 Broadway, two miles to the south. "We're growing fasterthan we thought," says John Tenanes, Facebook's director of real estate. "We'vejust run out of space at Madison Avenue."
Meanwhile, areas without such growing sectors have lagged behind, includingSunbelt cities. Also, the Washington, D.C., office market, which had been amongthe best-performing markets in the countryearly in the recovery, has been hit byfederal government cutbacks.
The vacancy rate in Washington rose to 9.7% from 9.2% a year earlier, accordingto Reis, while rents sought by landlords grew by 1.2%. "Washington is slow,Washington is soft," Steven Roth, chief executive of national office landlordVornado Realty Trust, VNO +0.29% said at an investor conference last month,according to a transcript. "We will rent the space we have. It'll just take some time."
Write to Eliot Brown at [email protected]
A version of this article appeared July 8, 2013, on page B3 in the U.S. edition of The Wall StreetJournal, with the headline: Office Recovery Stays Slow, Steady.