Office market situation improves in Q3

The office market improved during the third quarter.

Commercial property managers experienced improved office market conditions during the third quarter, as vacancies declined and leasing jumped, according to a report from CoStar Group.

The vacancy rate fell to 12.6 percent nationally during the third quarter, which was 0.5 percent lower than the same three months in 2011. Additionally, PPR, a subsidiary of CoStar, noted that the vacancy rate could drop close to 2 percent by 2016. The reason for the continued decline in office vacancies is the lowered level of properties that were leased. This figure dropped more than 20 percent in the last decade. There should also be a drop in total construction for the office market, which may force the vacancy rate to a lower level.

"The recovery is only one-third of the way there in the office sector, we still have two-thirds to go," said Walter Page, director of research and office for Property and Portfolio Research. "But it held up, and we expect it to continue to hold."

Leasing activity improves during the third quarter
The leasing activity in the office market should rise to more than 135 million square feet during the previous quarter, the report noted. This would bring the figure to nearly 5 million square feet higher than the second quarter's figures.

Examining regional areas, Aaron Jodka, the U.S. market research manager for PPR, noted this was led by Denver, Houston and Dallas. These areas are considered energy industry staples, and this may have contributed to the improvement. Additionally, Atlanta had improvements in leasing, as well as absorption during the previous quarter. The capital of Georgia experienced gains in jobs for insurance and consulting, among other strong points.

There also was an improvement in hiring, which improved the office sector situation, the report noted. This occurred despite the gross domestic product only growing 1.3 percent compared to 1.7 percent the previous quarter.

Additionally, the report added that because many tenants have lower rental levels, they worked to increase the value of their own, current space. Nearly three-quarters of the absorption during the second quarter was for high-end office space, but in the coming months, this should change to more middle-tier properties. There also may be a large amount of new space coming on-line in the next few months, as the past six months experienced 14 million square feet of new construction.

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