Cassidy Turley, a leading commercial real estate services provider in the U.S., reported today that demand for office space rebounded strongly in the second quarter of 2014, and the development pipeline of new office buildings is accelerating.
U.S. office markets absorbed 15.1 million square feet (msf) of office space in the second quarter of 2014, up 41% from the previous quarter, which was impacted by the severe winter weather. U.S. vacancy rates fell 10 basis points (bps) from 15.2% in the first quarter to 15.1% in the second quarter. Vacancy is now 220 bps lower than the recessionary peak, but remains elevated compared to pre-crisis levels.
Cassidy Turley Chief Economist Kevin Thorpe said the rebound was expected, but the details in the report pointed to stronger underlying trends.
“The office sector was due for a stronger quarter following the weather disruptions, but what is telling is that we are now observing stronger demand trends for Class B and C space in many markets, indicating tenant demand is spreading beyond the highest quality product,” Mr. Thorpe said. “Although high quality space still dominates leasing activity, the Class B and C segment of the market accounted for 40% of the absorption this quarter, a major shift from the 25% averaged earlier in the recovery.”
The second quarter report also revealed that both rental rates and development activity are picking up. Average asking rents in the U.S. rose 2.2% compared to a year-ago to $22.36 the strongest appreciation rate in nearly five years. There was 73 msf of new office space under construction as the second quarter closed, up 34% compared to a year ago.
Mr. Thorpe added,“Although development is picking up, the office sector does not currently face the cyclical headwind of overbuilding, and absorption rates are solid enough in most markets. The majority of the country should expect that office rents will grow at an accelerating rate in the second half of the year driven by improving economic data, improving confidence and steady job creation. This will not be true for all markets, but it will be true for most.”
Regionally, net absorption in the Northeast increased by 60% from the first quarter; the West was up 46%; and the South was down 4%. The Midwest, after a disappointing first quarter of only 396,000 square feet in net demand, saw a rebound of over 490%, posting over 2.3 msf of net absorption in the second quarter.
The top 10 strongest markets in terms of demand for office space were New York, with 1.6 msf of net absorption; San Jose, CA, with 1.4 msf; Houston, with 1.3 msf; Chicago, with 945,000 square feet; Orange County, CA, with 823,000 square feet; Atlanta, with 669,000 square feet; Phoenix, with 639,000 square feet; Seattle, with 622,000 square feet; Philadelphia, with 583,000 square feet; and Minneapolis, with 386,000 square feet.
The top 10 strongest markets in terms of rent growth were San Francisco, with 13.1% year-over-year rental appreciation; Houston, with 10.5%; New York, with 9.4%; Denver, with 8.4%; Phoenix, with 7.0%; Dallas, with 6.8%; Los Angeles, with 5.9%; San Diego, with 5.2%; San Mateo County, CA, with 4.8%; and San Jose, with 4.8%.
Cassidy Turley’s full first quarter office and industrial market reports will be available on the company’s website July 18.
About Cassidy Turley
Cassidy Turley (cassidyturley.com) is a leading commercial real estate services provider with more than 4,000 professionals in more than 60 offices nationwide. With headquarters in Washington, DC, the company represents a wide range of clients from small businesses to Fortune 500 companies, from local non-profits to major institutions. The firm completed transactions valued at $25.8 billion in 2013, manages approximately 400 million square feet on behalf of institutional, corporate and private clients and supports more than 24,000 domestic corporate services locations. Cassidy Turley serves owners, investors and tenants with a full spectrum of integrated commercial real estate services including capital markets, tenant representation, corporate services, project leasing, property management, project and development services, and research and consulting. Cassidy Turley enhances its global service delivery outside North America through a partnership with GVA, giving clients access to commercial real estate professionals in 65 international markets.