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Commercial Department: Property TypeCast: March 2013


Property TypeCast

Office properties end 2012 on a mediocre note

Given the fragility of the economic recovery, demand for office space remained weak this past fourth quarter and ended the year on a mediocre note. In the quarter, occupied stock increased by 3.9 million square feet. This represents a decrease versus the 4.8 million square feet absorbed in the third quarter, as well as against the 4.8 million square feet absorbed in fourth-quarter ’11. 2013-03_typecast

We are in the middle of a very slow recovery. This was the eighth consecutive quarter of positive net absorption. In 2012, 17.4 million square feet were absorbed — almost identical to the 17.5 million square feet of space absorbed in 2011. This mirrors the anemic rate of job creation at the national level in the past two years, and reinforces the notion that without a robust labor-market recovery, there will be no robust office-market recovery.Vacancy rates fell 10 basis points this past fourth quarter to 17.1 percent. This is slightly better than performance in the third quarter, when vacancies trended flat. On a year-over-year basis, the vacancy rate declined by just 30 basis points. With scant demand only slightly surpassing new completions, the pace of vacancy declines is glacial. The 30 basis points compression from this past year does exceed the 20 basis points compression from 2011. This was because of the decline in construction activity in 2012, however, and does not represent much of an acceleration in absorption. The national vacancy rate remains at levels unseen since 1993 and is well above the cyclical low of 12.5 percent from 2007, before the advent of the recession.

Asking and effective rents increased by 0.8 percent this past fourth quarter. This exceeded third-quarter figures, when asking and effective rents grew 0.2 percent. This was the ninth consecutive quarter that asking and effective rents have increased. Furthermore, this was the strongest performance of both measures since mid-2008.

Vacancy rates have compressed 50 basis points since peaking at 17.6 percent in fourth-quarter ’10. By historical standards, this remains a weak recovery, however. In the “jobless” recovery early last decade, the vacancy rate peaked at 17 percent at the end of 2003. By fourth-quarter ’05 (the comparable interval, given where we are in the current recovery), however, the vacancy rate had declined by 220 basis points to 14.7 percent.

Comparisons with the prior recovery emphasize how little demand is present in the market this time around. Since the vacancy rate peaked, net absorption has totaled 34.7 million square feet in the past eight quarters, or about 4.3 million square feet per quarter. In the prior recovery, through the first eight quarters after the vacancy rate peaked, net absorption totaled 108.3 million square feet, or about 13.5 million square feet per quarter.

With gross-domestic-product growth expected to be less than 3 percent in 2013, this year may well be a repeat of the past two, with the office sector eking out slight improvements in occupancy and rent growth. It is only if we observe a meaningful spike in job creation that we should expect stronger demand for office properties — and only then after some time has elapsed, so that employers feel the pressing need to lease new space to house their expanding operations.

Maria Gavilanes, office analyst from Reis, contributed to this article.


Victor Calanog is chief economist and senior vice president for research at Reis Inc. ( He writes a monthly column on property types for Scotsman Guide. Calanog and his team of economists are responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at

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