Los Angeles — Office vacancy rates declined in most major U.S. markets during Q2 2014, based on preliminary data from CBRE Group, Inc. Seven out of 13 major metro office markets saw vacancy fall and nine markets saw average asking rents increase as companies’ appetite for more space continues to grow.
“The U.S. economy continues to show broad based improvement and hiring remains healthy, which will provide sustained office demand improvements. Rent growth remains sturdy and continues to outpace inflation nationally,” said Art Jones, CBRE Senior Managing Economist.
The health of the metropolitan Phoenix market is reflective of these national trends. Locally, average asking rental rates at the end of Q2 were $21.18, up from $20.91 at the end of Q1. Vacancy also saw a slight improvement dropping from 22.1 to 21.9 percent Valley wide. And while these improvements in the local market are far from monumental, experts are optimistic about the continual improvement of the office market.
“The metropolitan Phoenix office market continues to strengthen. Quality buildings in premier locations are in high demand and large blocks of quality, contiguous space in well-located properties are becoming scarce,” said Kevin Calihan, Senior Vice President and market-leading office broker with CBRE Phoenix. “Build-to-suit activity has been ramping up over the past several quarters and this trend will continue as large users looking to locate or expand in the market struggle to find existing product that meets their needs.”
The U.S. industrial market also had healthy activity in Q2 2014, according to CBRE, with availability declining in eight of the 12 major markets. Demand for space was notably strong in Class A big-box space, driven by e-commerce, logistics and food facility users.
“The important demand drivers for the industrial sector continue to show strength. Inventories, trade, industrial production and employment are all expanding. This bodes well for the nation’s industrial sector,” said Jared Sullivan, CBRE Senior Economist.
Locally, the metropolitan Phoenix industrial market continues to see much activity and interest from potential users, with the Southeast Valley leading the way. First Vice President and industrial specialist Mike Parker says product in the less than 50,000 sq. ft. range has been particularly active.
“Most of the Southeast Valley submarkets have seen a decrease in vacancy of anywhere from 50 to 100 basis points during the past quarter,” said CBRE’s Parker. “Much of that decrease can be attributed to the high demand for small to midsized space, which is an excellent indicator of the improving health of the economy.”
- Atlanta led the way in vacancy declines, with a vacancy rate drop of 60 basis points (bps) during Q2 2014.
- Chicago posted a 50 bps fall in its office vacancy rate. Financial services, legal and technology firms were among the primary demand drivers for transactions greater than 30,000 sq. ft.
- The Seattle vacancy rate fell 30 bps as the local economy continued to thrive on high-tech expansion.
- Boston had the largest uptick in vacancy during Q2 2014, increasing 40 bps, as availabilities from prior quarters were not absorbed.
- Dallas and Washington, D.C. each saw 30-bps increases in vacancy during the quarter. Though the Dallas economy is fundamentally healthy, speculative development outpaced demand. Tenants continue to right-size and consolidate space in Washington, D.C.
- San Francisco led the U.S. with a 3.7% increase in average asking rents, followed by Houston, at 3.5%, as vacancy rates in both markets are near pre-recession levels.
- Office development remains subdued nationally, but markets such as Dallas and Seattle are seeing increased pipeline activity. Dallas now has 5.5 million sq. ft. under construction and Seattle has 4.0 million sq. ft. in the pipeline.
- Atlanta had the largest availability* rate decrease, with a 60-bps drop to 14.0%, driven by demand from manufacturing and logistics.
- Average asking rents grew in nine of the top 12 markets with only two markets showing declines. Northern New Jersey led the way with a 4.3% quarter-over-quarter rent increase.
- In general, the U.S. industrial market is experiencing a tightening supply, especially in the highly competitive big-box market. As a result, construction activity is increasing, both build-to-suit and speculative.
- Virtually all of the top markets are seeing construction pipelines return to pre-recession construction levels.
*Availability is space that is actively being marketed and available for tenant build-out within 12 months.