How Good Economic News Impacts CBD Office

With employers hiring, manufacturers making things again, and consumers once again going to dinner, we appear to headed into better times for our economy. As we try to determine what this means for commercial real estate,  activity in the Central Business Districts (“CBD”) of America is a good indicator for the office market as a whole.

Now we have some facts to impart about the impact of this nascent recovery on CBD office markets based on Cushman & Wakefield’s first quarter US report released April 28th (the summary report is included in this post).

Sunrise over the CBD?

  • Leasing activity nationwide is up 30% compared to Q1 last year
  • Of note, Houston saw a 300% increase in leasing activity followed by Midtown South Manhattan at 217% and Denver/San Diego both at about 150% increase
  • Averaged CBD vacancy increased from 14.7 to 15 percent.
  • The pace of increase in vacancy is slowing across the US.
  • The vacancy trend continued to impact rental rates which saw a 6.6% decrease from this time last year

Our own practice would indicate an increase in activity but many are doing more with less. If a company can finally justify getting out in the market with its lease, then in many cases they can slough off the sublease space they were using. Or perhaps their architect can help figure out the latest way to save space. Put succinctly: there is activity, but in many, if not most cases, companies are looking for less space.

The unknown is what will happen when hiring returns. Our advice is to “go long but option up” to mean lock in the longest lease term as a hedge against future rate increases, but negotiate with the landlord to provide future flexibility for growth and contractions.

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U.S. OFFICE VACANCIES INCREASE, RENTS DECREASE DESPITE STRONGER LEASING ACTIVITY IN 1Q 2010

Cushman & Wakefield today released first quarter 2010 statistics for the U.S. office market that show national leasing activity has strengthened year-over-year, although vacancies have continued to increase and rental rates have further declined.

A total of 13.8 million square feet of office space in U.S. central business districts (CBDs) was leased during the first quarter of 2010, a 30 percent increase from the 10.6 million square feet leased during the first quarter of 2009. Approximately half of the CBDs tracked by Cushman & Wakefield saw a year-over-year increase in leasing activity. Among the most significant were Houston (300 percent increase), Midtown South Manhattan (217 percent increase), Denver (149 percent increase) and San Diego (150 percent increase).

Despite an increase in leasing activity for most markets, CBD vacancies increased throughout the U.S., albeit at a slower pace than this time last year. The average U.S. CBD vacancy rate reached 15.0 percent at the end of the first quarter of 2010, up from 14.7 percent at then end of 2009. Nine cities did chart a vacancy decline in the first quarter of 2010, with Denver (16.5 percent vacancy), Silicon Valley (23.1 percent vacancy) and Westchester County, N.Y. (15.6 percent vacancy) having the largest declines, registering 0.8 percent, 0.5 percent and 0.4 percent, respectively.

“The rate at which vacancy was increasing has undoubtedly slowed, and several markets have begun to strengthen after hitting bottom in 2009,” said Maria Sicola, executive managing director and head of Americas Research for Cushman & Wakefield. “Tenants throughout the U.S. – driven by expiring leases and favorable terms – are making commitments, which have significantly improved leasing activity.”

The top five CBDs tracked by Cushman & Wakefield with the lowest overall vacancy rates in the nation at the end of the first quarter of 2010 were Midtown South Manhattan (9.9 percent), Downtown Manhattan (10.0 percent), New Haven, Conn. (10.9 percent), Houston (12.4 percent) and Midtown Manhattan (12.6 percent).

Continued increases in vacancy contributed to additional declines in average asking rents across the U.S. The overall average asking rent for U.S. CBDs was $36.88 per square foot at the end of the first quarter, a $2.62 per square foot or 6.6 percent decrease from this time last year. Average asking rents fell in the majority of U.S. CBDs, with Midtown Manhattan, Boston, Midtown South Manhattan and San Francisco charting the largest decreases.

During the first quarter of 2010, nearly all of the CBDs recorded negative absorption – meaning more available space was brought to the market than taken off, or leased. However, year-over-year, absorption increased in the majority of these markets. Nationally, overall absorption was negative 5 million square feet in the first quarter of 2010, compared to negative 14 million square feet in the first quarter of 2009.

Ken Ashley

Source: Cushman & Wakefield Research

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