U.S. Office-Market Recovery Stalls as Rent Growth Slows

The U.S. office-market recovery struggled to accelerate in the second quarter as occupancy gains stalled and rent growth slowed, Reis Inc. said.

Effective rents, or what’s paid after any landlord discounts, climbed 0.4 percent from the previous three months. That’s down from 0.7 percent growth in the first quarter and 0.8 percent at the end of 2012, the New York-based property-research firm said in a report today. Tenants paid an average of $23.23 a square foot in the three months through June, up 2.1 percent from a year earlier. The vacancy rate held at 17 percent.

“With the labor market unable to generate significant office-using employment, demand for space remains enervated,” Ryan Severino, senior economist for Reis, wrote in the report.

The firm expects the rest of the year to be little changed from 2012, with sluggish job growth, government spending cuts and increases in taxes and interest rates weighing on the office market. Without stronger demand, it will take years for rents to return to the 2008 peak of about $25 a square foot, Reis said.

An average of 196,000 jobs a month were added in the second quarter, Labor Department figures show. That’s down from 207,000 positions a month in the first quarter, a sign that the employment-market recovery is “downshifting a bit,” Severino wrote. Many of the jobs being created are in sectors that tend to use less office space, such as construction, manufacturing, retail and health care, he said.

Vacancy Rate

While unchanged from the first quarter, the U.S. office vacancy rate fell from 17.3 percent a year earlier. The rate has been between 17 percent and 17.6 percent since the end of 2009. It was 13.2 percent in the second quarter of 2008, before the financial crisis, Reis data show.

“Without even modest demand, the decline in the national vacancy rate will not accelerate,” Severino wrote.

Construction of new offices rebounded from a 14-year low in the first quarter, more than tripling to 7.59 million square feet (705,000 square meters) -- or about two and a half times the size of New York’s 1 World Trade Center. It was the largest amount of new space completed in three years, according to Reis.

Still, that number barely exceeded the 7.23 million square feet of net absorption, the difference between the amount of space put on the market and the amount leased, Severino said.

“There is little to no demand for space in existing buildings,” he wrote. “Clearly, the market is favoring new space.”

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