Is it the end of the tenants’ market in office leasing? That’s one takeaway from last week’s upbeat news that vacancies are down and, for the first time in four years, average rents are up.

“The psychology of the market is shifting. We are clearly transitioning into the new landlords’ market,” says Tony Pierson, managing director of portfolio management at New York-based investment manager Cornerstone Real Estate Advisers LLC. “Tenants are realizing that now is the time to lock up space, because it probably won’t get any cheaper if they wait.”

That may be putting the cart slightly ahead of the horse, but the news was encouraging. A survey by Reis Inc. of the top 64 U.S. markets show the lowest vacancy rate in two years—16% at the end of March, down from 17.3% in March 2003. At the same time, rents increased 0.7% during the first quarter to hit $20.25 per sq. ft. The 0.7% increase may seem tiny, but it represents the first time that average rents have increased since the first quarter of 2001.

What’s driving the improvement in occupancy? One big factor is renewals that include space expansions by existing tenants who are now anticipating bigger space needs as their businesses expand. In Manhattan, for example, BNP Paribas, a financial services firm, renewed its lease, taking 330,000 sq. ft. at 787 Seventh Ave. That’s an expansion of 80,000 sq. ft. The bank's lease wasn’t set to expire until March 2007. BNP Paribas was interested in locking in its new lease at current rents rather than hazarding a renewal under less favorable terms down the road, says Jones Lang LaSalle. Consulting firm McKinsey & Co. also renewed early at 55 East 52nd st. for roughly 300,000 sq. ft.

Landlords in Manhattan and across the U.S. can thank the labor market for helping turn the tide on rising vacancy and cheap rents. Monthly job gains have been reported for the past 22 months, adding up to 3.1 million jobs through the end of March.

But how many of these jobs actually require office space? Four sectors account for roughly 70% (or 1.5 million) of the new jobs gained over the past 22 months, with the service sector leading the way. Nicholas Buss, vice president of PNC Real Estate Finance, reports that over the past year alone, the professional and business services sector added 609,000 new jobs.

To put the U.S. jobs figures into perspective, the average job growth of 1.7% in February registers .08% above the job growth rate established in March 2001, widely considered to be the peak of the last economic boom. While the jobs market is clearly improving, many markets are still experiencing job growth that still falls below March 2001 levels (see chart, below).

Region Percentage of current job growth above or below March 2001 level February 2005 job growth
U.S. Average .08% 1.7%
San Francisco -13.5 0.4
Detroit -6.5 1.0
Boston -5.6 1.5
New York -3.8 1.0
Chicago -3.6 0.7
Denver -3.5 2.4
Los Angeles -2.8 0.3
Dallas -2.7 1.9
Atlanta -1.6 1.0
Washington, D.C. 7.4 3.0
Las Vegas 20.9 7.4

Souce: PNC Real Estate Finance

Certainly, the signs are positive, but the markets have a long way to go. Rents at the end of March remain 20% below their peak of $25.34 per sq. ft. in March 2001, reports Reis. Meanwhile, according to PNC Real Estate Finance, 28 of the nation’s 62 largest metro markets have still not moved from recovery to expansion. Two of the most depressed markets — San Jose and Detroit —still failed to add jobs in March. San Jose has had a particularly rocky time. Over the past four years, this market shed 209,000 jobs, or 20% of its job base in 2001. Buss of PNC projects that Detroit and San Jose may need as much as five years to get back to their prior employment peak in March 2001.