Commercial real estate: office sector sees regional fluctuations, remains flat

The office segment of the commercial real estate market has seen marginal gains due to stagnant job growth and geographical volatility.

According to a recent National Real Estate Investor article, the national office vacancy rate declined to 17 percent during the first quarter as employment numbers improved.

National vacancies still remain 450 basis points above the recession low in 2007. Despite continued job growth, with 85,000 per month in 2010, to over 182,000 per month in 2012, there are just enough jobs to maintain current office demand. Construction companies have experienced difficulty securing financing, especially for office developments, as high vacancy and existing office space absorbs current demand.

A meager 1.697 million-square-feet of new office became available during the first quarter – the lowest figure since 1999, according to the Real Estate Information Service.

The effect of the recession can still be felt when assessing rent levels, as rent levels are still tethered to 2007 benchmarks. Both asking and effective rents grew by 0.7 percent during the first quarter – down from 0.8 percent but still above the quarterly average. This growth is mostly the result of high-performing metropolitan areas with robust tech and energy companies, while most other areas have seen declines. Effective rent rates would be cut in half if the top performing markets were left out of the national average, indicating distorted levels of performance.

While job growth is still considered the most significant contributing factor to the recovery of the office segment within commercial real estate – April seeing 165,000 additional jobs – job growth is adversely affected by government legislation – in particular austerity measures.

The Washington D.C. area in particular will experience high vacancy rates as companies propped up on government contracts begin sequester-related lay-offs. In fact, the effect is already being felt – Washington's vacancy rate has already risen by 20 basis points during the first quarter.

New York Policy
According to the New York Real Estate Journal, the Capital Region office market is doing well with a 14.2 percent vacancy rate – at least when comparing it to with the national vacancy rate. Eric Simonds, of CBRE in Albany, notes that, since 2010, the New York region office vacancy rate has been increasing, and the cause is inter-related with government decisions.

Recently, New York made a policy decision requiring the state to migrate all its employees from leased, private properties to state-owned buildings. The shift caused $21.5 million in losses for property owners' lease revenue and increased vacancy rates in the central business districts and suburban markets, as well as in the already struggling downtown Albany office market, illustrating that more than just job growth can affect the micro office market.

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