U.S. Office Market Flatlines in First Quarter of 2009
The U.S. office market greeted the first three months of 2009 by continuing its downward spiral, marking the worst quarter since the third quarter of 2001 and the 9/11 terrorist attacks, according to the Q1 office report from Colliers International, the global real estate services firm. As anticipated, national office vacancies kept rising—increasing by 95 basis points—from 13.80 percent at year-end 2008 to 14.75 percent at the close of the first quarter of 2009.
A significant contributor to this spiking vacancy rate was a further increase in space available for sublease, according to the report. Nationally, total available sublease space rose by 7.5 million square feet during the first quarter of this year, and representing 11.1 percent of total vacant office space. Major central business district markets with well-above-average levels of sublease space include Manhattan (29.0 percent of vacant space) and Boston (21.5 percent of vacant space). Similarly, notable suburban markets with above-average levels of sublease space include the San Francisco peninsula (28.0 percent), Northern Virginia (22.0 percent), Fairfield County/Greenwich, Connecticut (20.0 percent), and suburban Maryland (15.0 percent)
Across the country, vacancies in Class A buildings rose 1.02 percentage points to 14.63 percent in the first quarter. Meanwhile, the combined vacancy rate for Class B and Class C properties rose 88 basis points, up to 14.63 percent in the same period. The office sub-category with the highest vacancy rate was the Suburban Class A market, clocking in at 16.45 percent.
As for new supply, there was a moderate increase on this front during the first quarter. Approximately 15.4 million square feet of new construction was completed in the January through March period, almost 70 percent of which occurred in the suburbs.
“As jobs continue to disappear nationwide, we see a commensurate decline in office occupancy,” says Ross Moore, executive vice president at Collier, who is predicting more of the same in the next quarter and warns property owners and managers to “steel” themselves for this happening.
In terms of office rents, rates fell in almost all markets surveyed and, overall, the downtown average Class A asking rate measured $43.36 per square foot, down 5.47 percent from year-end 2008. At the same time, tenant incentives also increased during the first quarter, with average tenant improvements up 7.7 percent, coming in at $29.63 per square foot, based on a five-year lease term. Free rent increased 17.7 percent to 4.3 months. “All this points to how tenants are now very much in the driver’s seat, as landlords become increasingly anxious to maintain occupancies,” Moore adds.