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Tags: Rent | Growth | Office | Vacancies

San Francisco Leads Rent Growth as U.S. Office Vacancies Decline

Thursday, 05 April 2012 08:15 AM EDT

Demand from technology and energy- industry tenants led the U.S. office market to its fifth straight quarterly gain in net occupancy, with San Francisco leading the country in rent growth, Reis Inc. said.

Office landlords had a net increase in leased space of almost 6 million square feet (557,000 square meters) in the three months through March, compared with 6.1 million square feet a year earlier, the New York-based real estate research firm said in a report today. The vacancy rate dropped to 17.2 from 17.6 percent in the first quarter of 2011.

Occupancy and rents are increasing as the U.S. economy slowly recovers from the recession and the office market rebounds after three years of net losses in leased space. Cities with a large base of technology employers, including Boston, Seattle and San Francisco and San Jose in California, accounted for five of the 10 strongest markets for rent growth last quarter, Reis said.

“Technology is growing faster than any other industry” and those companies are willing to pay a premium for locations that will attract employees, said Bill Goade, chief executive officer of Boston-based Cresa, the largest tenant-representation firm in North America. “Law firms and financial services are all trying to do with less square footage.”

Expansion by technology tenants such as Apple Inc., Amazon.com Inc. and EMC Corp, the largest maker of storage computers, helped shrink vacancies on the West Coast and Northeast, while strength in oil and natural-gas demand bolstered Texas, Reis said. Office markets in cities that got overbuilt during the housing boom, including Las Vegas, remain weak, according to the report.

Largest Rent Increases

Nationwide, effective rents, or what tenants pay after landlord concessions, rose to an average $22.66 a square foot from $22.20 a year earlier, Reis said.

San Francisco’s average office rent rose 6.8 percent during the past year. A slow recovery in financial services held New York to the second-biggest gain, 4.8 percent, Reis said. Rents climbed 4.1 percent in San Jose, 2.5 percent in Boston and Houston, and 2.3 percent in Denver and Seattle. Houston is home to energy employers including BP America, Citgo Petroleum Corp. and ConocoPhillips.

Washington had the lowest vacancy rate, 9.4 percent, followed by New York at 10.4 percent, according to Reis. San Francisco had the eighth-lowest rate at 14.2 percent. Thirty- four of the 79 major markets tracked by the firm had office vacancies lower than the national average.

Landlord Risks

U.S. job growth remains tepid, raising the risk that leases expiring this year may be renewed at equivalent or lower rents, diluting landlord incomes, Ryan Severino, an economist at Reis, said in the report.

“The labor market is struggling to consistently gain more than 200,000 jobs per month,” he said. “This is very weak by historical standards for periods of economic recovery.”

The U.S. office market is rebounding from a loss in occupied space of 137 million square feet from 2008 to 2010, more than the total inventory of office buildings in Boston, according to Reis.

A small amount of development is keeping vacancies from rising, the firm said. In the first quarter, 1.92 million square feet of new office space was completed. That’s down from 4.87 million square feet a year earlier and the smallest annual space increase since Reis began tracking the data in 1999.

© Copyright 2023 Bloomberg News. All rights reserved.

Thursday, 05 April 2012 08:15 AM
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