The overall office vacancy rate has increased over the past year due to net negative absorption and unneeded supply increases. Fortunately, only three buildings will be added to the existing stock over the next 12-18 months and the largest one is preleased to a government entity. The net result of new construction will be 58,000 of new inventory coming on line. Finally the market will have an opportunity to absorb the existing stock.
According to the Colliers International Market Report for the First Quarter 2011, the overall office vacancy rate was 25.6%. There is a glimmer of good news, however. The increase to the vacancy rate is slowing so we feel the market should stabilize later this year. The market did experienced positive absorption in Class A and C property types for the quarter. Unfortunately, the negative net absorption in Class B was too large to result in an overall positive quarter for the market. The Class A market shows the highest vacancy rate, currently in excess of 30%. This statistic is somewhat distorted by a number of large new buildings that were built in outlying locations which were to take advantage of executive residential growth that has not occurred. Well located, high quality buildings that price aggressively to retain tenants are still performing reasonably well.
The report also tracks asking rental rates by product type and submarket. Across the board, rental rates have fallen but how much is hard to determine. According to the report, average asking rental rates are down $0.14 per square foot per month compared to the first quarter of 2010. Unfortunately, the report tends to overstate current average rents. It has become common practice for landlords to provide a teaser rate for the early months then increase the rent substantially over the term of the lease. For example, if a tenant were to execute a five year lease their rate would likely start at $1.50/sf/mo. and increase $0.25 every six months until a stabilized rate of $2.50/sf/mo. is reached. Once a more stabilized rental rate is reached, the lease increases would normalize. When the broker reports the rate, he\she would report the average rate based upon the life of the lease, which would be significantly higher than the starting rate of $1.50/sf/mo. Because of the reluctance to share information by landlords and brokers, an accurate current market rate is impossible to determine. As the market stabilized over the next 12 months, accurate market rents will be easier to obtain. Most brokers and owners agree that we are near or at the bottom of the office market and rents should stabilize within the near term.
* Colliers International First Quarter 2011 Office Report
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