Office Vacancy Declines In Major Markets In Q1 2013; Biggest Drops in Denver and San Francisco

Moderate Decline In Industrial Availability

San Francisco, March 21, 2013 Office vacancy rates declined or held steady in most major U.S. markets during Q1 2013, according to preliminary data from CBRE Group, Inc. Six of the 12 largest markets showed declines in office vacancy, led by Denver and San Francisco, while two markets remained stable. Industrial availability* continued to decrease moderately in major U.S. markets, according to CBRE.

“Market fundamentals continue to improve as the economy slowly recovers and the employment picture brightens,” said Asieh Mansour, PhD, CBRE’s Head of Americas Research. “Although the economic rebound is tepid by historical standards, real estate markets are being helped by a dearth of new construction, which is allowing excess space to be steadily absorbed. The consolidating federal government sector, however, does provide a drag on the recovery in certain markets.”

Office

In the major U.S. office markets tracked by CBRE, Denver recorded the biggest drop in vacancy during Q1, decreasing 60 basis points (bps).  San Francisco had the second-biggest decrease, with a 40 bps decline. Both markets saw asking rates rise due to heightened leasing activity in combination with constrained supply.  Washington, D.C. and New York registered the sharpest increases in vacancy, at 40 bps and 30 bps, respectively.  Decreased activity by the federal government and a cautious financial services sector continue to weigh on these markets.  Rental rates for Class A space continued to trend higher and concessions remained stable or declined modestly in most markets. While speculative office construction is being contemplated in a few major markets, most developers are focused on build-to-suit projects, which are more readily financeable in today’s environment.

Colin Yasukochi, Director, Research & Analysis for the Bay Area notes, “The San Francisco office market trend of tightening vacancies and rising rents continued in the first quarter of 2013. Leasing activity did slow compared to the same quarter a year ago as did the rate of rent increase. With new construction deliveries and starts expected to rise over the next 12 months, more space choices will become available”

Q1 2013 Preliminary Office Statistics
[table] Market, Q113 Prelim Vacancy Rate %, Q412 Final Vacancy Rate %, BPS Delta
Atlanta, 22.2, 22.3, -10
Boston, 13.0, 13.0, 0
Chicago, 17.9, 18.1, -20
Dallas, 19.0, 19.0, 0
Denver, 14.5, 15.1, -60
Los Angeles, 16.9, 16.8, 10
Miami, 17.8, 17.9, -10
New York, 7.6, 7.3, 30
Phoenix, 23.7, 23.9, -20
San Francisco, 9.1, 9.5, -40
Seattle, 15.5, 15.4, 10
“Washington, D.C.”, 14.2, 13.8, 40
[/table]

Industrial

During Q1 2013, availability rates for major U.S. industrial markets continued to decrease moderately.  At 60 bps, Boston and Miami had the largest decreases in availability rates compared with Q4 2012. During Q1 2013 rents were unchanged, but tenant concessions decreased, especially for Class A industrial buildings. Demand for warehouse and distribution space remained high, particularly in New Jersey, Los Angeles and Denver. Industrial rents are approaching replacement-level costs, making development increasingly feasible. However, most construction activity remains build-to-suit, while speculative construction was largely confined to markets with shortages of large, contiguous blocks of warehouse and distribution space.

“Large blocks of contiguous warehouse/distribution space in key port markets and super-regional centers are in demand.  Consolidation of the logistics firms and ecommerce trends are the key drivers of the bulk warehouse distribution space,” said Ms. Mansour.

Q1 2013 Preliminary Industrial Statistics

[table] Market, Q113 Prelim Vacancy Rate %, Q412 Final Vacancy Rate %, BPS Delta
Atlanta, 17.5, 17.6, -10
Boston, 15.1, 15.7, -60
Chicago, 9.2, 9.1, 10
Dallas, 13.2, 13.6, -40
Denver, 7.3, 7.5, -20
Los Angeles, 6.9, 6.6, 30
Miami, 9.1, 9.7, -60
New Jersey Northern, 10.2, 10.1, 10
Phoenix, 13.2, 13.6, -40
San Jose, 11.2, 11.3, -10
Seattle, 9.6, 9.7, -10
[/table]
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