U.S. Office Rent Growth to Be ‘Modest’ in 2011, CB Richard Says
U.S. office rents will increase for the first time in three years in 2011, with growth “modest and limited to key markets” before a recovery accelerates in 2012, according to CB Richard Ellis Group Inc.
San Francisco rents probably will lead gains, with an average annual rise of at least 9 percent during the next two years, the world’s biggest real estate services firm said in a report to be released this week. New York is next at more than 7 percent. Phoenix and Orange County, California, may lag behind, with rents falling at an annual rate averaging more than 4 percent.
U.S. commercial real estate values began rising last year, with prestige locations in coastal cities such as New York, Washington and Boston leading the recovery and Midwest markets and those hit hardest by the housing bust continuing to struggle. Office vacancies stabilized midyear and are poised to improve through 2012 as job creation accelerates and demand picks up, the brokerage said. Rents may return to their pre-recession peak in 2014.
“The pieces are in place” for office rents to rise, said Art Jones, senior economist for CBRE Econometric Advisors, a research unit of Los Angeles-based CB Richard Ellis. “Once hiring picks up, the market’s in a good position to capitalize and recover.”
The vacancy rate at U.S. offices fell 0.2 percentage points in the fourth quarter to finish 2010 at 16.4 percent without any significant job growth, the brokerage said.
Rents in 2010 fell to $25.62 a square foot from $26.84 in 2009. The firm projects they will rise to $26.08 in 2011.
Pittsburgh is among the metropolitan areas best positioned for rent growth, Jones said. The Midwest city began shifting in the early 1980s from its dwindling steel industry to stress health care, education and banking. With little new construction, occupancy rates climbed in the city that is home to PNC Financial Services Group Inc. and more than 7,500 employees of BNY Mellon Corp. This led to slow, steady annual rent growth.
Pittsburgh’s office vacancy rate was 11.2 percent at year-end, lower than the U.S. average, according to CB Richard Ellis.
“It’s not Silicon Valley,” Jones said. “It’s a very slow-growing place. And you don’t see a lot of construction here, and I don’t think you will see a lot of construction.”
Office rents nationwide are expected to reach $29 a square foot by the end of 2013. The brokerage says rents could return to their 2008 peak of $30.57 cents by the following year. Vacancy could fall to 13.3 percent by 2014, the lowest since 2007, the report said.
CB Richard Ellis measured the rent at which leases are signed, known as “effective rent,” rather than the rents landlords advertise, Jones said. Its calculations are adjusted to account for free-rent incentives offered by landlords. They don’t include allowances for office renovations.
To contact the editor responsible for this story: Kara Wetzel in New York at email@example.com