The news from the 4th quarter of 2009 was better than expected, according to many market analysts, especially in that all important gauge of office rentals. For many investors, office rentals tend to reflect what’s happening in the economy overall.
When rentals go up, the business climate Is healthy. When it goes down, the message read by many is that businesses are generally contracting, choosing not to risk new space and overhead in the anticipation of uncertain times.
Job statistics across most sectors, of course, continued their downward slide right up to the end of the year. Even so, the office market in the U.S. posted a somewhat unexpected positive new absorption for the last three months of the year.
U.S. jobs data reported an increase of 48,000 office jobs in December. Even the financial sector posted an increase of 4,000 December jobs, the first increase since July 2007. Overall, office-using employment is up 154,000 jobs since the end of August 2009. For commercial property investors—including those who are on the sidelines awaiting for a market turnaround—these numbers certainly merit closer examination.
The turn-around may not be here yet, but the waters are apparently beginning to stir up.
In their quarterly State of the U.S. Office Markets webinar, CoStar Group Inc. reported a positive net absorption of about 6 million square feet for the quarter, which is about 6 months earlier than was expected. Gross leasing activity grew from about 60 million square feet of activity in the first quarter of 2009 to more than 90 million in the fourth quarter. While this is not exactly a record setting rebound that some have been looking for, it certainly can be called a very nice little bounce.
Time will tell just how significant that last quarter really was. As the economy stabilizes, it could take some time for positive numbers to flow fully through to the office market. Recent GDP reports have been encouraging, but there is still a lag in hiring across the board—as often happens with a recession.
Notwithstanding the bright spots in office jobs market, we could still see net negative absorption all through 2010. What will be interesting is whether the fact that this is an election year will speed up a recovery to any noticeable extent.
Nationally, that absorption bump in the 4th quarter brought the national vacancy rate to about 13.1%, but total office space availability is still increasing to almost 18%. That may put a damper on the reported Q4 positive absorption over the short term.
Rents, incidentally, are expected to continue their downslide even as demand stabilizes. Office rents nationally declined by almost 10% on the average. Many landlords outside the largest metro areas are using concessions to entice new tenants, holding off on rent reductions as long as possible. At some point, barring a truly big bounce in the economy, asking rents may have to be slashed even more. That’s why the news about rising office market statistics have some wondering if the cavalry may arrive in time, after all.
Opportunities may exist as distressed assets are purchased by well-capitalized ne owners with lower debt obligations. They could be in a strong position to undercut the competition, but of course this in turn pulls down market rents within any given market area.
It should also be noted that differences still remain between different geographic areas. New York reported 1.6 million square feet of positive new absorption, whereas Orange County, CA, posted negative net absorption of 1 million square feet, and San Francisco, 900,000 square feet. The three western states, WA, OR, and CA, combined for about 2.1 million square feet in negative net absorption.
