Commercial real estate observers have cheered the office sector's slow but sustained recovery over the last few quarters, one that has begun to seep into secondary markets after getting its start in major U.S. cities.
The U.S. Department of Labor's May jobs report threatened to kill the buzz. Unemployment ticked up to 9.1% from 9% in April, while the economy generated only 54,000 nonfarm payroll jobs during the month. That was a steep drop from the roughly 200,000 or more created in each of the prior three months.
While still remaining cautiously optimistic about the office sector overall, “caution” is the prevailing word, says Victor Calanog, vice president of research and economics for Reis, a New York-based commercial real estate research organization.
“At the end of the day, with job growth that's relatively mild or modest, you shouldn't expect a whole lot of positive absorption in the office sector,” he says.
Calanog nevertheless echoes widespread sentiment that the disappointing May jobs report represented a blip in the recovery's overall upward trajectory.
To be sure, evidence to date supports office sector hopefuls. Companies absorbed 5.5 million sq. ft. of office space nationwide in the first quarter this year, marking the second straight quarter of positive absorption, according to Reis, which tracks single and multi-tenant office buildings of more than 15,000 sq. ft. Companies gave back 12.5 million sq. ft in 2010's first quarter.
The average national vacancy rate dropped to 17.5% in the first quarter this year from 17.6% at the end of 2010. The slight improvement marked the first vacancy decline since the third quarter of 2007, Reis says.
Office landlords also boosted asking rents in the first quarter to an average of $27.66 per sq. ft., up from $27.53 a sq. ft. at the end of 2010. That was the second consecutive quarterly increase in asking rents, which had been falling since 2008.
While rebounding office fundamentals are still choppy from market to market, the climate better resembles an early phase in the real estate cycle than last year, suggests Brett White, CEO of Los Angeles-based brokerage CB Richard Ellis. Pent-up demand that fueled leasing activity in 2010 represented more of an anomaly.
“We're in much more of a normal phase of the leasing cycle and an improving economy,” says White.
New York-based Brookfield Office Properties, which owns 69.3 million sq. ft. of office space in the U.S., Canada and Australia, recorded 2.8 million sq. ft. in new leases in the first quarter.
That was the company's second-most prolific quarter, trailing only the 3.8 million sq. ft. of leases executed in the fourth quarter of 2007, said Brookfield CEO Ric Clark during the company's quarterly earnings call in May.
Brookfield also was pursuing “serious discussions” with tenants for 9.5 million sq. ft. of additional leases, he told analysts.
“Our take is that although there are soft spots in the economy, particularly in secondary markets, the world is recovering faster than most people think,” said Clark.
The lack of new construction remains a positive for the office market, too, observers say. Developers added 3.9 million sq. ft. in the U.S. in the first quarter. That was up from 2.3 million sq. ft. in the fourth quarter of 2010, which was the lowest amount of office space built since Reis began covering real estate in 1999.
The potential for a quick run-up in occupancies amid a lack of new supply hasn't been lost on office investors. Office buyers and sellers executed $42.7 billion in sales in 2010, nearly triple the volume in 2009, according to New York-based Real Capital Analytics, which tracks deals $5 million and higher.
“Sales volume is increasing very, very quickly,” says White of CB Richard Ellis. “These are the kind of times that investors tend to get pretty excited and pretty active.”
OFFICE LEASING REGAINS A PULSE
Top office owners signed several significant new leases and expansions in the first half of 2011, continuing the momentum that began last year. In most cases, tenants still have the upper hand.
|Brookfield Office |
|Oppenheimer Funds||Two World |
|Hines||Alston & Bird||One Atlantic Center||Atlanta||134,000|
|Vornado Realty |
|NYU Langone |
|One Park Avenue||New York||180,000|
|Shorenstein Properties||Wilbros United |
|Five Post Oak Park||Houston||44,200|
|CB Richard Ellis Investors||CMA-GGM, Oracle, Russel Research||Metropolitan Center||East Rutherford, N.J.||26,400|
Source: Company reports