First Quarter Office Sector Fundamentals Improving, Demand Remains Subpar

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Demand for office space in the first quarter of 2013 flattened as businesses continue to push for space efficiency, according to research released by Cassidy Turley, a U.S. commercial real estate services provider.

U.S. office markets absorbed 3 million square feet (msf) of office space in the first quarter, down from 23 msf in the fourth quarter. Although this marks the third straight year of consistent net growth in the office sector, the first quarter demand figures were the weakest since the recovery began in 2010. Vacancy rates in the first quarter remained flat at 15.4%—still 200 bps higher than pre-recession levels.

“Market fundamentals continue to improve, but at the same time, the office sector is clearly going through a transformation,” said Kevin Thorpe, Chief Economist at Cassidy Turley. “Many businesses are reassessing space needs and recognizing they can function perfectly well with a smaller, more efficient footprint. As a result, job growth is not giving us the same pop in demand that we have grown accustomed to.”

Average asking rents in the first quarter of 2013 registered at $21.63, unchanged from the same period a year ago. New office construction increased from 41.8 msf in the fourth quarter to 48.9 msf in the first quarter of 2013.

“The development pipeline remains lean,” Thorpe said.  “Even with a slight pickup this quarter, new supply coming to the market is still 30% below the norm. The supply constraints are critically important for restoring balance to the office sector.”

The top 10 strongest markets in terms of demand for office space were Dallas, with 728,000 sf of net absorption; Tampa, with 613,000 sf; Boston, with 610,000 sf; Denver, with 576,000 sf; Minneapolis, with 491,000 sf; Northern New Jersey, with 434,000 sf; Seattle, with 396,000 sf; Charlotte, with 328,000 sf; Raleigh-Durham, with 325,000 sf; and Suburban Maryland, with 299,000 sf.

The top 10 strongest markets in terms of rent growth were New York, with 11% year-over-year rental appreciation; Salt Lake City, with 10.9%; San Jose/Silicon Valley, with 10.3%; Austin, TX, with 6.6%; Denver, with 6.2%; Houston, with 5.6%; Dallas, with 4.7%; Nashville, with 4.3%; New Haven, CT, with 4.3%; and San Mateo, CA, with 3.4% rent growth.

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