Rents and Occupancies Typically Rise More Quickly in a Recovery
U.S. office rents and occupancies inched higher in the third quarter, as a gradual improvement in the overall economy is translating into a sluggish recovery in the office sector.
Average rents sought by landlords reached $29.62 a square foot in the quarter, up 0.4% over the second quarter and 7.7% since the postdownturn nadir reached in 2010, according to real-estate research firm Reis Inc. REIS +0.34%
Businesses took on an additional 7.2 million square feet in the quarter, a small increase that left the average vacancy rate at 16.8%, the same as the second quarter and down from a postdownturn peak of 17.6% in 2010, according to Reis, which used data from 79 metropolitan areas.
In typical recoveries, vacancies tend to fall and rents tend to rise more quickly, particularly five years after a recession. Yet the vacancy rate today remains well above the 12.5% reached at the market’s peak in 2007.
That has been good news for tenants because slack demand has made it difficult for landlords to raise rents.
“We’re dealing with still-elevated vacancy rates, and that makes it more challenging for landlords,” said Ryan Severino, an economist at Reis.
Rents are poised to rise about 3% in 2014, up from 2.1% in 2013 and 1.8% in 2012, he said.
Commercial real-estate markets can vary greatly by location. Cities with strong technology or energy markets have been booming, setting off waves of new construction and pushing rents up rapidly.
For instance, rents in the San Jose, Calif., region, which includes Silicon Valley, increased 6.7% over the past 12 months to an average of $26.93 a square foot, making it the fastest-growing region in the country, according to Reis. San Francisco rents rose 5.1%—third fastest in the U.S.—as companies including Uber Technologies Inc. expanded rapidly into new space.
Rents in Dallas and Houston, both of which have enjoyed growth from the energy sector, increased 5.2% and 4.4%, respectively, over the past 12 months.
Growth in many other cities, including New York, has come largely from those sectors. MediaMath Inc., a software company that helps companies buy advertisements, has about 300 employees in Manhattan, roughly double what it had a year ago. After it ran out of space in its main Midtown Manhattan office, it had to lease another space a few blocks away, forcing employees to shuttle between the two locations.
In July, it signed a lease for 106,000 square feet at 4 World Trade Center, the new 72-story skyscraper in lower Manhattan. That is up from the 90,000 square feet it currently occupies in three locations. “We’re certainly anticipating growing pretty quickly,” said Joe Zawadzki, the company’s chief executive.
Despite the sluggish growth overall, many executives in the property sector see the pendulum gradually swinging in favor of landlords.
Dennis Friedrich, who heads the office division of the property giant Brookfield Property Partners L.P., said he has observed a change in the attitudes of large companies that are considering what to do with their real estate. “The larger tenants have really come off the sidelines,” said Mr. Friedrich, who signed leases with major tenants in recent months including department-store owner Hudson’s Bay Co.
