National office vacancy is above its long-term average of 14.7%, although it remains below the peak level of 19.1% in 1991, according to a report from Torto Wheaton Research. The firm reports that the real estate market continued to weaken in the first quarter of 2003, with office vacancy rising 16.5% at the end of the fourth quarter of 2002 to to16.9% in the first quarter of 2003.Industrial vacancy also rose by 0.3% during that period.
Not all markets were consistently weak, however. Torto Wheaton reports that some markets defied the downward trend with actual year-over-year improvements in the supply and demand balance.
In the industrial sector, vacancy increases have been fueled by deliveries of single-tenant buildings, which were created due to the low interest rate climate. In the face of deteriorating market fundamentals, however, these interest rates continue to keep cap rates low and prices high.
In the office sector, nine U.S markets posted vacancy decreases over last year. The most dramatic decrease occurred in Riverside, Calif., where rates fell 490 basis points between the end of the first quarter 2002 and the first quarter of 2003. Ventura, another California city, posted a –400 basis point drop in vacancy year-over-year. Philadelphia also was at the bottom of the list with a –40 basis point decline in vacancy.
Of the 10 cities that posted a first quarter vacancy rate below 10%, four were in Southern California, where above average economic growth has kept the office market strong.
Ten industrial markets posted vacancy decreases between the end of the first quarter 2002 and 2003. Leading the charge was Tucson, where vacancy fell 240 basis points year over year. Riverside held second place on this list and Washington, D.C., ended the list with a –20 basis point decline in vacancy year over year.