Office Recovery Hits Halfway Point as Demand for Space Spreads Across More US Markets

Posted on April 25, 2014

The U.S. office recovery continued to hum quietly along in the first quarter, absent any dramatic surges or spikes. As a result of the measured pace of increasing tenant demand, the national office vacancy rate remained unchanged from the previous quarter at 11.9%, according to CoStar’s First Quarter 2014 Office Review and Outlook.

Overall net absorption of U.S. office space is running ahead of last year’s pace with 74 million square feet absorbed over the last 12 months, compared with 61 million square feet during the previous year period through first-quarter 2013. Also, the 16 million square feet of office space absorbed in the first three months of 2014 is an increase of nearly 78% over the 9 million square feet logged in the first quarter of 2013.

“The office recovery has now reached the halfway point,” said Walter Page, CoStar Group director of office research, who presented the quarterly update along with Managing Director and Chief Economist Hans Nordby and Aaron Jodka, manager of U.S. market research.

“We expect a slow and steady straight-line improvement in the vacancy rate to 11.1% by 2016,” Page added.

As expected, office vacancy is continuing to decline at a rate of about one-tenth of a percent per quarter, decreasing 50 basis points from a year ago to 11.9% in the first quarter, which is unchanged from fourth-quarter 2013.

“We’re going to cross the long-term vacancy rate of 11.7% in the next quarter or two,” Page added. Vacancy rates are dropping below 10% in major metro areas throughout the country, setting the stage for strong rental rate growth.

Driven by the technology boom and the rapidly accelerating housing recovery, suburban office markets have accounted for the lion share of leasing activity, generating 83% of total U.S. net absorption over the last year.

And more markets are joining the recovery, particularly in the Midwest, with CBD markets such as Cleveland, Detroit, and St. Louis, and suburban markets such as Kansas City, are now seeing rising demand. But the Houston suburban market remains the biggest story of all, logging a staggering 7.7 million square feet of suburban absorption over the last year.