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U.S. Office Vacancy Rate Falls to Almost Three-Year Low

U.S. office vacancies dropped to their lowest level in almost three years as demand from energy and technology companies combined with a dearth of construction to overshadow cuts by government employers, Reis Inc. said.

A total of 17.1 percent of the country’s office space sat empty as of Sept. 30, down from 17.4 percent a year earlier and 17.2 percent in the second quarter, the New York-based real estate research firm said today. Vacancies were the lowest since the fourth quarter of 2009, when the rate was 17 percent.

Demand for office space is strongest in cities where technology and energy firms are major employers, such as San Francisco and San Jose in California; Houston and Austin in Texas; and New York, Seattle and Boston. Vacancies also have been driven down by just 2.84 million square feet (264,000 square meters) of space being added in the third quarter, “the equivalent of only a handful of medium-size office buildings,” according to Reis.

“The ‘creative’ industries and those tied to energy are growing,” said Lisa Picard, Seattle-based executive vice president and regional manager for a unit of Stockholm-based construction company Skanska AB. “At the same time, there’s a general trend where companies are trying to develop efficiencies” and put more employees per square foot.

Office landlords had a net gain in occupancies for the seventh straight quarter, with an increase of 5.45 million square feet, according to Reis. That was up from gains of 5.33 million square feet a year earlier and 4.46 million square feet in the second quarter, the smallest increase in a year.

Rents Increase

There were gains in both landlords’ asking rents and what tenants paid after any discounts in the third quarter, Reis said. Asking rents rose to an average of $28.23 per square foot from $27.84 a year earlier and $28.17 in the second quarter. Effective rents rose to $22.78 a square foot from $22.40 a year earlier and $22.72 in the prior three months.

“Although this is the eighth consecutive quarter of positive asking and effective rent growth, the pace of improvement remains painfully slow,” Ryan Severino, senior economist at Reis, wrote in today’s report. “Many of the jobs being created are in sectors that do not generally utilize office space,” such as retail, hotels, education and health care, he said.

U.S. payrolls rose less than projected in August and the unemployment rate was unexpectedly driven down by Americans leaving the workforce, according to a Sept. 7 Labor Department report. Employers may be reluctant to expand hiring amid the global economic slowdown and the so-called fiscal cliff, the $600 billion of tax increases and spending cuts that will take effect automatically at the end of 2012 unless Congress acts.

Fewer Giveaways

The U.S. office market is improving enough that landlords are beginning to end such breaks as a period of free rent to attract tenants, said Asieh Mansour, San Francisco-based head of Americas research for Los Angeles-based broker CBRE Group Inc. The pullback on giveaways is most dramatic in central business districts, where vacancies have been lower than in suburban markets, she said.

“In some markets where vacancy rates are very low, we’re maybe not seeing rent growth yet, but the type of tenant-improvement packages, concessions -- those are starting to go away,” Mansour said.

While Washington held onto the lowest office vacancy rate nationally last quarter, at 9.5 percent, it was up from both the second quarter and a year earlier, Reis said. Office vacancies have been climbing in the city since the second quarter of last year, when the rate was 9 percent. Washington is struggling with “political deadlock and contracting government employment,” according to the firm.

“Leasing activity has really slowed” in Washington, Mansour said. “D.C. is the one we’re keeping a close eye on.”

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