Q4 2012 Office Market Posts The Stongest Quarter in Five Years

January 25, 2013 Off By Chris

Arrow pointing upDespite economic uncertainty related to the fiscal cliff, demand for office space surged in the fourth quarter of 2012. U.S. office markets absorbed 20 million square feet (msf) in the fourth quarter, up from 7.2 msf in the third quarter, resulting in the strongest quarter of demand for office space since pre-recession 2007. Vacancy rates in the fourth quarter fell 30 basis points (bps) from the previous quarter to 15.4 %.

There clearly was pent up demand forming in the office sector. The job numbers have been reasonably healthy for quite some time, but the office demand data have been largely disappointing. Our recently released fourth-quarter 2012 office report suggests the office sector is finally falling in line with the momentum we are observing in the rest of the economy.

In the fourth quarter, all four census regions in the U.S. recorded positive demand for office space and falling vacancy. Of the 80 metros tracked in the study, 66 reported gains in occupancy.

Fourth-quarter results were impressive when you consider the worst-case scenario the fiscal cliff presented and the possibility of relapse into recession. Businesses generally don’t expand into more space unless they feel confident in the economic trajectory.

Average asking rents in the fourth quarter of 2012 rose to $21.69, a 1% increase compared to the same period a year-ago.

Make no mistake, this remains a tenant’s market. Vacancy is eroding, but is still 200 bps above the norm. Until that space is filled, tenants can press for lower rents. The rent growth you are seeing nationally primarily is being propelled by a handful of West Coast, tech-driven markets and the New York City market. The majority of the metro areas we track are still fighting to eke out any rent growth at all.

Trend to watch: Businesses are getting more space-efficient.

In the wake of the recession, many businesses have been looking at their corporate real estate portfolios and determining that they can function with 20-30% less space. That, in combination with open floor plans and benching systems, has resulted in subpar absorption numbers relative to past recovery cycles. According to a survey conducted by CoreNet Global, the amount of office space per worker has declined from 225 sf prior to the recession to 176 sf in 2012. It is estimated that it could decrease to as low as 151 sf by 2017.

For Cassidy Turley’s fourth-quarter 2012 office report, click here.

Do you think the U.S. office market will continue to remain strong as we move into 2013?