Office Construction Declines to Low as Rents Rise Slowly

U.S. office construction dropped to the lowest level in at least 14 years in the first quarter as slowly rising rents and high vacancies discouraged developers from building, Reis Inc. said.

Office completions totaled 1.58 million square feet (147,000 square meters) in the three months ended March 31, down 45 percent from a year earlier and the smallest amount since Reis began publishing construction data in 1999, the New York-based property-research firm said today. Completions fell from 2.89 million square feet in 2012’s first quarter and 3.35 million square feet at the end of the year, according to Reis.

Jobs aren’t being added fast enough to spur a significant rise in office rents and occupancies, Reis said. Employers added 236,000 workers in February, after a 119,000 rise in January, according to the Labor Department. Payroll gains averaging about 180,000 a month in 2012 would lead to a “very gradual decline” in the unemployment rate, which is at 7.7 percent, Daniel Silver, a JPMorgan Chase & Co. economist, said in an e-mail.

“If demand for office space were stronger, vacancies should fall at a much faster pace given extremely limited supply growth,” Victor Calanog, chief economist at Reis, said in today’s report.

Office vacancies dropped to 17 percent nationally from 17.3 percent a year earlier and 17.1 percent in the fourth quarter, following the same pace of “sluggish” improvement in the past five quarters, Reis said.

Below Peak

Vacancies are 4.5 percentage points higher than the low in the third quarter of 2007, before the recession began, and rents are about 7.7 percent less than the mid-2008 peak, the firm said. Both asking rents and effective rents, or what tenants paid after any landlord concessions, rose 0.7 percent in the first quarter, according to Reis.

Landlords had net occupancy gains of 4.02 million square feet last quarter, down from 5.27 million square feet of so-called net absorption a year earlier, according to Reis. Net absorption was 3.32 million square feet in the fourth quarter.

“Like other sectors in real estate, the office sector posted consistent signs of recovery in the first quarter,” Calanog said. “However, the glacial pace of occupancy and rent gains has yet to accelerate.”

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