Nation's office vacancy rates climb to highest level in four years

The vacancy rate for office space in the nation's major markets increased to its highest level, 13.7 percent, since the second quarter of 2005, but it is still below its high in the past decade of 15.5 percent which was reached in the second and third quarters of 2003, according to a report issued today by Cushman & Wakefield Inc.

In March, the vacancy rate was 12.5 percent, the study found, adding that the 13.7 percent vacancy rate in the second quarter "coincided with a 19 percent decline in overall leasing activity, which totaled 8.6 million square feet compared to 10.6 million square feet in the first quarter of 2009." "It has risen 3.5 percentage points since this time last year and 4.0 percentage points since the start of the recession in December 2007," the report said.

"With unemployment at a 26-year high and nearing 10 percent, that inevitably translates into reduced demand for available office space, which has been reflected in the vacancy rate, leasing activity and absorption statistics year-to-date," said Maria Sicola, executive managing director and head of Americas Research for Cushman & Wakefield.

"One bright spot," she noted, "is that the rate of negative absorption started to slow in the second quarter, and leasing activity picked up in June, two trends that seem to indicate that tenants are beginning to act on opportunities to lock-in value in the current environment in advance of a rebound."

The report maintained that "Although the rate of negative absorption slowed in the second quarter, the total absorption rate for the first six months of 2009 totaled negative 24.9 million square feet, which compares to negative 4.2 million square feet for the first six months of 2008."

Economic conditions and market fundamentals contributed to a 3.2 percent decline in overall average asking rents, down to $38.25 per square foot from $39.50 in the first quarter. Despite lower demand, average asking rental rates continued to climb in eight cities, down from 14 cities that experienced rental rate increases in the first quarter. According to Ms. Sicola, recent rental rate increases are "primarily attributable to the delivery of new construction," which tends to raise the overall average asking price for available space. "Despite statistical increases, effective rents have been significantly reduced across the board," Ms. Sicola said.

The top five lowest vacancy rates in the nation at the end of the second quarter were recorded in New Haven, Conn., at 10.0 percent; New York City at 10.5 percent; Portland, Ore., at 10.9 percent; Philadelphia at 11.6 percent; and Boston and Washington, D.C., each at 11.7 percent.

Considering New York City's Downtown and Midtown South submarkets independent from Midtown, the two submarkets were tied for the lowest vacancy rate in the nation at the end of the second quarter, of 8.7 percent, up from 8.1 percent at the end of March.

Downtown and Midtown South, with 88 million square feet and 65 million square feet of office space, respectively, are the fourth and fifth largest office markets in the nation behind Midtown Manhattan, Chicago, and Washington, D.C.

New York City lead the 31 markets surveyed with the highest average asking rent in its central business district in the second quarter of 2009, $60.23, a decline from the first quarter of 7.4 percent. Washington, D.C. had the next highest asking rent, $46.81; followed by Fairfield County, Conn., $44.34; Palm Beach, $40.27; Boston, $37.30; San Francisco, $36.48; Los Angeles, $35.68; Bellevue, Washington, $35.60; Miami, $34.53; and Ft. Lauderdale, $32.55; Westchester County, $31.77; Chicago, $31.09.