Absorption Up, Vacancy Down as U.S. Office Markets Post Third Straight Year of Declining Vacancy
After posting 10 consecutive quarters of decreasing overall vacancy thanks to continued positive absorption and relatively moderate construction levels, U.S. office markets showed steady improvement during the third quarter, according to CoStar's just-released Third-Quarter 2006 Office Report.
With a healthy 28,523,205 square feet of positive net absorption, U.S. office markets closed out the quarter with a vacancy rate of 11.6%, the lowest rate in nearly three years. A total of 579 office buildings completed construction during the quarter totaling 18,681,745 square feet, with 122,453,435 square feet still under construction at the end of the quarter.
With the positive absorption signaling continued demand, average rental rates increased slightly during the quarter to $23.05 per square foot.
A total of 13 office markets recorded 1 million square feet or more of positive absorption during the third quarter led by surprising Atlanta with 1.88 million-square-feet. Los Angeles, Washington and New York City followed. Other markets posting million-square-foot-plus quarters included Philadelphia, Boston, San Francisco, Denver, Houston, Phoenix, Silicon Valley, Chicago and Baltimore.
While the vast majority of markets posted absorption in positive territory, most of them recorded 500,000 square feet or less, indicating a relative stable overall market in terms of supply and demand.
Dallas/Fort Worth led the nation in office vacancy at an average of 17.5%. Detroit followed with an office vacancy of 16.9%, Cincinnati and Memphis were the only other two office markets with average vacancy above 15%.
New York City and Miami/Dade County took top honors as the two office markets with the lowest vacancy rate for the quarter at 6.4% each.
Local Market Highlights
Atlanta: The Atlanta office market ended the quarter with a vacancy rate of 14.0%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 1,882,275 square feet. A total of 37 buildings with 1,482,895 square feet of space delivered to the market, with 3,933,600 square feet still under construction at the end of the quarter.
Austin: The Austin office market ended the quarter with a vacancy rate of 12.5%. A total of 16 buildings with 185,021 square feet of space delivered to the market, with 1,385,922 square feet still under construction at the end of the quarter.
Chicago: The Chicago office market ended the quarter with a vacancy rate of 14.0%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 1,183,654 square feet. At the end of the quarter, 4,214,390 square feet of new office space was under construction.
Dallas/Ft Worth: The vacancy rate remained unchanged in Dallas/Ft Worth in the third quarter at 17.5%, the highest for any single U.S. market. During the quarter, another 1,049,686 square feet in new space delivered while positive absorption totaled less than one million square feet. More than four million square feet is currently under construction.
Los Angeles: The Los Angeles office market ended the quarter with a lower vacancy rate of 7.8% helped by positive net absorption totaling 1,786,850 square feet.
New York City: With no new office space being delivered to the market, and positive 1,611,483 square feet of net absorption, New York City's vacancy rate dropped from 6.8% to 6.4% in the quarter. At the end of the quarter, there was 8,950,879 square feet underway for future delivery.
Orange (California): The Orange (California) office market saw vacancies fall and rental rates increase from the second quarter 2006 to the third quarter 2006. The overall vacancy rate currently sits at 7.0%, from 7.2% in the previous quarter. Although just 260,088 square feet of new space delivered in the quarter, there is 5,329,453 square feet currently under construction.
San Diego: The San Diego office market was one of the few to see overall vacancy increase during the third quarter to 10.0% with very low positive net absorption resulting from 10 new office buildings with 676,631 square feet delivering during the quarter with 4,998,087 square feet still under construction.
Washington: The Washington office market ended the quarter with a vacancy rate of 9.3%, a slight increase over the previous quarter despite positive net absorption totaling 1,760,197 square feet. Washington led all markets in adding new space. A total of 33 buildings with 2,653,217 square feet of space delivered to the market, with 15,411,479 square feet still under construction at the end of the quarter.
Largest Lease Signings
The largest office lease signings occurring in the third quarter included Moody’s 589,945-square-foot lease at 7 World Trade Center in New York City; the 481,981-square-foot lease signed by the U.S. Department of Justice at Liberty Square in Washington, D.C.; and the 480,147-square-foot lease signed by Chevron at Continental Center I in Houston.
Largest Office Building Completions
The largest projects underway at the end of third quarter 2006 were Harrison Metro Centre, a 3.65 million-square-foot building in the Northern New Jersey market with 96% of its space pre-leased, and Freedom Tower, a 2.6 million-square-foot office tower in New York City that is 100% pre-leased.
The complete report, as well as separate reports for individual markets, are available online to CoStar Property subscribers after logging in at www.CoStar.com. Simply select the "CoStar Third Quarter Market Reports" link listed under the Property Professional window. Copies are also available to non-subscribers for a fee. Please contact a CoStar sales professional at 877-726-7827. Each quarterly report highlights leasing and sales activity, inventory and development analysis, presented for the market as a whole, by property class, and by individual submarkets.