National office vacancy continued to drop in the third quarter, hitting its lowest level in 3.5 years. Data from Manhattan-based real estate research firm Reis Inc. shows that office vacancy fell to 15.1% at the end of September from 15.4% at midyear.

Effective rents also increased by 0.8% during the third quarter, hitting an average of $20.41 per sq. ft. That key measure increased while the net absorption rate — defined as the amount of office space leased during the quarter — hit 12.1 million sq. ft., which was a decrease from the 20.2 million sq. ft. absorbed in the second quarter.

Even the supply side is restrained, which bodes well for the near term office market. Only 6.5 million sq. ft. in new office space was completed during the third quarter, down from 8.3 million sq. ft. in the third quarter of 2004.

Reis projects that 36.7 million sq. ft. of new space will be finished in 2005, which would represent an increase from the 30.4 million sq. ft. completed in 2004. Still, it’s far below the 2001 peak supply of 121.8 million sq. ft. Reis also projects that 2006 will see roughly 82 million sq. ft. of net absorption. If that estimate is met, the national vacancy rate could drop below 14% by the end of next year.