Office rent growth slows, tenant demand remains high

St. Louis had a negative absorption rate during the second quarter.

While many companies have filled office space around the country, commercial property managers have not seen many rental increases, according to a report from CoStar Group.

The firm's report, "Second-Quarter 2012 Office Review & Outlook," found that office job growth grew 1.9 percent during the quarter, which was significantly slower than the first quarter's 2.8 percent. This can be looked at as a negative, but it is still better than the current economic growth rate.

There was a absorption rate of nearly 1 percent during the second quarter, which was close to 63 million square feet, according to the report. This was still only approximately 50 percent of the country's total office job growth. When looking at cities, both Houston and Atlanta were two of the best-performing cities in the findings. Houston specifically had a 3.1 million square-foot gain in net absorption.

"Overall for the office market in terms of demand, it’s a pretty good story," said Hans Nordby, managing director of CoStar's Property and Portfolio Research.

Both Northern New Jersey and St. Louis struggled during the quarter, as both experienced losses of some companies, which brought net absorption into the negative, according to the report. However, Detroit, San Francisco, New York and Minneapolis experienced an improved recovery situation, as many new jobs have been created in the past 12 months. Orange County also had an uptick.

Vacancies declined slightly during the second quarter, the company said. The total vacancy rate dropped to 12.6 percent, which was 20 basis points below the first quarter's figure. However, it was 70 basis points lower than the same point in 2011.

While the rate is dropping, it has not declined fast enough, the report explained. This is because there was a significant amount of shadow inventory created during the recession, which has cut down on a higher net absorption rate.

The report added that the highest demand is for properties considered to be four-star or five-star, as these have doubled tenant absorption rates. However, this will eventually spread to lower-quality properties. Furthermore, the total inventory for commercial real estate properties may take and additional three to four years to have a replenished office supply.

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