U.S. Office Market On Track to Bottom Out at Year-End

The U.S. office market vacancy rate rose by 50 basis points in the first quarter of 2010 to 17.9 percent versus an increase of 30 basis points in the fourth quarter of 2009, according to analysis from Grubb & Ellis.

First quarter absorption remained about even with the fourth quarter of 2009 at minus 7.3 million square feet.

On the supply side of the market, developers delivered 8.2 million square feet of new space, down slightly from 9.3 million in the prior quarter. Space still in the construction pipeline drifted lower for a seventh consecutive quarter to 25.7 million square feet. This is equivalent to 0.6 percent of the inventory, the lowest level in more than 14 years, says Grubb & Ellis.

There was a 1.0 percent uptick in the average asking rental rate for Class A space to $31.10. The average Class B rate was $23.00, an increase of 0.8 percent. This data series is volatile, so it is unlikely that rents have stabilized while the vacancy rate continues to rise, says Bob Bach, senior vice president, chief economist, Grubb & Ellis.

In a more definitive sign of recovery, sublease space offered on the market decreased to 113 million square feet, down more than 10 million square feet over the past two quarters.

The office market appears on track to bottom out by year-end, says Grubb & Ellis.
In the current cycle, employment appears to have bottomed out in the fourth quarter of 2009, meaning that vacancy should peak within the next two or three quarters if the market repeats the pattern of the last downturn. Rental rates are expected to bottom out one or two quarters after that. Most likely, the market will not return to equilibrium for at least three years after the vacancy rate peaks, meaning 2013 or 2014.

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