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Approaching a Tipping Point? U.S. Office Rent Growth Lags Despite Rising Tenant Demand

With Little New Supply Slated For Delivery, Landlords Should Slowly Gain Pricing Power If Recovery Remains On Track

By Randyl Drummer
Although rising levels of office absorption and a falling U.S. vacancy rate signal a strengthening market, the gains have yet to translate into meaningful rent increases for office landlords in most markets, CoStar Group reported this week in the company’s Second-Quarter 2012 Office Review & Outlook.

This week, CoStar analysts drilled deeper into the office market numbers in a report on the national office market at midyear 2012 presented to CoStar clients. And while they see encouraging signs in the broader CRE market, specifically in the office and industrial sectors, they cautioned that the recovery is likely to be slow and dependent on the rate of job growth.

“Overall for the office market in terms of demand, it’s a pretty good story,” said Hans Nordby, managing director of Property and Portfolio Research (PPR), CoStar’s analytics and forecasting division. Nordby was joined by Walter Page, PPR director of research; and Jay Spivey, CoStar senior director of research and analytics.

Although office job growth slowed on a year-over-year basis to 1.9% from last quarter’s 2.8%, it’s still growing at a much stronger rate than the broader U.S. economy, which remains a nagging source of concern to economists.

Office job growth is the life’s blood of real estate fundamentals. And those fundamentals are starting to pick up momentum, with net absorption of U.S. office space more than doubling from 8 million square feet in the first quarter to 18 million square feet in the second quarter of 2012. Despite the surge in absorption “it’s still not a screamer of a quarter” compared to the boom years of 2005 and 2006, Nordby noted.

Net absorption over the last year has totaled about 63 million square feet, translating to a 0.9% rate of growth in office demand, roughly half the rate of office job growth, Page noted. Houston, the nation’s top energy market, led the nation in absorption growth at 3.1 million square feet of net absorption. The long-suffering Atlanta market is starting to show significant demand growth.

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This entry was posted on July 19, 2012 by in Finance, Market Updates, National, Office and tagged , , , .
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