Commercial Real Estate Office Trends Q2 2013 Summary

Reis VP of Economics & Research, Dr. Victor Calanog, provides an update on the office sector performance for the 2nd quarter of 2013.

  • Vacancies remained unchanged at 17% in the second quarter
  • New construction added 7.6 million square feet
  • Asking & effective rents grew by 0.4%
  • Remainder of the year will be a continued slow recovery

Commercial Real Estate Office Trends Q2 2013  Video Transcription

Office sector vacancies trended flat in the second quarter relative to the first. Vacancies remained unchanged at 17%. There were some good points regarding this quarter’s performance such as new construction coming in at a relatively healthy 7.6 million square feet, about three times the amount that came online in the first quarter. What’s great about that is with net absorption totaling about 17.2 million square feet, all of the new construction basically came online and was absorbed indicating the kind of demand that could support stronger supply growth despite the fairly slow recovery trajectory.

Asking and effective rents both grew by 0.4% at the national level. This is really no surprise at this point for the office sector. You've got a slow economic recovery underpinning anything that the office sector can register, so when you take a look at the past 11 quarters when asking and effective rents have risen, they've only risen by 4.7% and 5.4% respectively. The office sector could manager that kind rent growth in a single year, and they've had almost 3 years to get that done given the slow recovery.

When you look at local markets you can see that neighborhood economics still plays a huge part in what’s going on. Where the job market is strong expect better performance from the office sector. You've got the top five effective rent growth markets being San Jose, San Francisco, New York, Seattle and Houston. Those are basically labor markets which are resurgent when it comes to hiring because you've got the energy sector and the tech sector powering hiring in those markets. When you look at the other side of the coin you got Washington DC at this point reeling from sequestration and a possible dampening demand. Vacancies are still pretty tight at 9.7%, but they've been rising. They rose by 20 basis points this quarter; the same amount as in the last quarter, and surrounding Northern Virginia and suburban Maryland are also showing a slight increase in vacancies.

The prognosis for the rest of the year is going to be a pretty slow recovery much like the rest of the expectation for the nation. You got 2% GDP growth expected for the rest of the year and a 1.8% at annualized rate in the first quarter. You can’t expect much from the office sector with that kind of slow economic growth. On the one hand, things are slow, but on the other hand, things aren’t collapsing. As long as there isn’t a big macro event that shunts us towards recession, which is a bit unlikely at this point, you should expect slow recovery for the office sector for the remainder of the year.