NORTHEAST
Lack of construction has created an office space crisis for growing companies in metro Boston. In the suburbs, delivery year-to-date of 3.6 million square feet of Class A supply tells an important tale when compared with demand. Class A net absorption at mid-year stands at 3.3 million square feet. The majority of Class A absorption is in new buildings that are immediately filled when their doors open. Space left by these tenants is quickly back-filled by others.
Total suburban absorption in all classes of space at mid-year is already 6.0 million square feet, compared with 5.3 million square feet for all of 1999! Only 3.3 million square feet are actually under construction and just 1.1 million square feet remain for prelease.
Suburban vacancy, at 8.0% in January, has already plunged to a scant 4.5% at mid-year and will continue downward. Cambridge is at full occupancy and, worse, a construction moratorium is in place. Waltham, on Route 128 at the Mass Turnpike, has only 1.6% vacant.
Tenants, if they can find space, will continue to exhibit sticker shock confronted by Class A rents which are rocketing upward through the $50-per-square-foot level. Boston’s downtown vacancy is an astonishing 1.4%, and Class A rents have shot to $60 plus with new construction under way already 60% committed.
Rents will continue to escalate with tenants increasingly being subjected to demands for higher rents by landlords, even after having agreed to a proposal only days before. Demand is outstripping construction and unless one of these important drivers changes, tenants must commit right now at record rents to meet tomorrow’s space needs.
At mid-year, leasing momentum is up sharply in the Boston Metro industrial sector, with 3.2 million square feet absorbed and a vacancy decline to only 5.8%. Speculative warehouse construction is being rapidly preleased and new R & D; construction,at 2.2 million square feet,contains a large portion of telecom/switch facility development.
The shift to telecom creates a problem for traditional industrial users. Space available to them is declining rapidly and at this rate, vacancy will be well below 5% by year’s end. Given current construction levels, there is little evidence that speculative building is increasing to the level needed to balance demand for space by traditional industrial users. As a result, rents will escalate sharply, particularly in the warehouse and R & D;/office/flex sectors.
Limited development activity and a single high-profile tenant flight comprised the significant events of the second quarter and underscore the tightness of Manhattan’s office market. Reduced availability is the catalyst for this activity, spiking asking rents and provoking public policy initiatives.
Overall, asking rents have jumped by 14% over the first six months to reach $51.82 per square foot, up from $45.33 per square foot at the start of the year. Trophy property contract prices reached as high as $105 per square foot this quarter and lease components continue to shift in the landlords’ favor, with reductions in concessions common.
Presently, the market cannot accommodate the demand for tenant expansion, offering in adequate choices for many large users. Chase Manhattan Bank recently announced plans to move into two build-to-suit Jersey City towers that will total 1.1 million square feet. The prospects of substantial incentive packages, in addition to already cheap rents, has steadily enticed dissatisfied tenants to cross the Hudson. Recent announcements by the Related Cos., Vornado, Forest City Ratner and Brookfield Properties, however, reveal development plans that may provide relief.
Leasing velocity during the quarter kept up with the pace of the past year. Thus far in 2000, 19 million square feet in leases were signed, up from 11 million square feet this time last year and 16 million square feet in the latter half of 1999. More transactions are taking place as firms realize they must engage the market to secure desired space. This considerable activity contributed to 3,943,988 square feet of absorption in Manhattan this quarter, pushing availability down from 5.85% to 4.6%.
In one year, Manhattan availability has been cut in half, from 31,299,962 square feet to 14,801,485 square feet. The telecommunications industry has emerged as a major player in the leasing market over the past year and accounted for 10% of leasing volume this quarter. Only one of the top telecom transactions occurred downtown, with 10 of the 11 deals above 20,000 square feet closed north of Canal Street.
The telecom industry, providing the infrastructure for this economy’s high-tech transformation, has improved the functionality of New York real estate in response to tenants’ shifting priorities. Today, tenants’ concerns over adequate bandwidth often surpasses that of geographic location.
New media accounted for one-fourth of the leasing volume for the quarter, up from 7.9% just one year ago. In this quarter, 2.5 million square feet were leased by the sector, up from 1.2 million square feet during the fourth quarter of 1999. A majority were small to medium-size deals, with 79% of the transactions for fewer than 20,000 square feet.
As the Long Island economy’s metamorphosis continues from defense-oriented to high-tech based industries, neither stock market declines nor rising interest rates have affected or interrupted its progression. Although many real estate professionals felt a cooling off was imminent, the commercial real estate market has continued to improve unabated.
The Long Island office market is experiencing all-time lows in vacancies across all classes of space, rendering this an owners’ market. With the vacancy rate currently at 5.9% and continued high demand, landlords are being prompted to seek rents for Class A space of up to $32 per square foot in Nassau and $28 per square foot in Suffolk. Even with record high rents, tenants are not hesitating to expand their space requirements when necessary. This is evident at 201 Old Country Road in Melville, which brought 220,000 square feet of Class A space to the market in December and is now more than 50% leased.
This decline in vacancy rates, along with the current demand levels for office space, has sent real estate professionals looking to uncover properties in prime areas with potential for office or high tech conversions. We are observing a number of buildings being upgraded to Class A space. Examples are the new Corporate Center on Maxess Road, which is being transformed into a 150,000-square-foot Class A building by T. Weiss Realty Corp., and Reckson’s Class B building on Marcus Drive in Melville.
This trend is expected to continue through the end of the year with supply-side relief in sight for large blocks of Class A space upon the completion of the 277,000-square-foot building in Melville by Reckson.
Even with rising interest rates and stock market declines, the Long Island’s industrial real estate market has continued strong. Because of the decline in available space, construction is on the rise and industrial land sales are up. As vacant land begins to dwindle, especially in the Hauppauge Hub, developers and owners are being forced further east into Ronkonkoma area.
Westchester County has experienced several quarters of positive net absorption, placing availability at 17.3% at the end of the second quarter. This represents an improvement of two percentage points from year-end 1999 and about 465,000 square feet of positive net absorption. Local expansions, particularly in Internet and high-tech businesses, have been the primary force behind the healthy pace of leasing. And as the story changes, signed leases now average 30,000 square feet to 50,000 square feet, as opposed to a year ago when the entrepreneurial businesses were taking smaller spaces at an average size of 5,000 square feet to 20,000 square feet.
The White Plains central business district has become the destination of choice by these high-growth businesses for its abundance of quality space with good fiber infrastructure, urban amenities and access to transportation. With more than 260,000 square feet of positive net absorption over the quarter and about 330,000 square feet year to date, White Plains now has only 21.4% of the office market available, a dramatic difference from a year ago when availability was 31.0%. Since then, 360 Hamilton Ave., a renovated building under Reckson ownership, has attracted several tenants generating more than 180,000 square feet of leasing activity, rendering it about 50% leased. Recent additions to the tenant list include Prudential Securities leasing 32,000 square feet, Pangea Management Services leasing 11,000 square feet and Metromedia Fiber Networks leasing 80,000 square feet.
Several buildings in the White Plains market have been renovated and upgraded to meet tenant requirements. The success of these buildings has brought confidence to the White Plains market, raising asking rental rates more than $2.00 per square foot over a year. Class A buildings are at an average of $27.74 on a full-service basis, up from $25.58 a year ago.
While internal growth has been the leading cause of market improvement, relocations from outside the county remain a factor. InSite Services moved from Manhattan to 42,571 square feet at 44 South Broadway in White Plains. And, in a shift in migration patterns, Greenwich Technology partners moved from Greenwich to 29,400 square feet in White Plains.
Westchester County and White Plains in particular will continue to benefit from the tight New York City and Fairfield County markets. While the improving market is causing real estate costs to increase, Westchester is still a significant bargain compared with New York City and, at present, can still offer large blocks of quality space to high growth businesses.
In Fairfield County, Conn., more than 680,000 square feet was absorbed over the quarter, causing availability to drop from 11.2% to 9.4%. Activity in each of the five submarkets supported the positive quarterly outcome. Stamford experienced a significant amount of absorption this quarter in each of its three submarkets: central business district, North and South Stamford. In the central business district, Stamford Plaza alone saw more than 80,000 square feet of activity. In total, the central business district had about 200,000 square feet of positive absorption leaving only 8.6% of the 6.8 million square feet available. North Stamford experienced a total of 145,000 square feet of net absorption. Westvaco, in a relocation from New York, took the entire 73,600-square-foot building at 1 High Ridge Park and WebHouse Club expanded its presence in the Park by another 28,000 square feet. As a result, High Ridge Park is now 100% leased, compared with a year ago when 40% of the space was on the market.
Also in North Stamford, Riverbend Center experienced 32,600 square feet of absorption with e-media taking 20,000 square feet. Riverbend is now about 99% leased with approximately 40,000 square feet available, compared with a year ago when about 20% of the park was on the market.
While Stamford continues to be a desirable address, businesses are looking beyond the central business district for cost benefits, access to highways, transportation and labor.
Relief from the pressures of a space shortage may come to Stamford’s central business district. New development could begin as soon as this fall as Louis Dreyfus is preparing to demolish its existing 65,000-square-foot structure on Richmond Hill Avenue to make way for Connecticut Place, a 570,000-square-foot office tower. Yet new construction will be undertaken cautiously, still requiring significant preleasing and asking $42 per square foot net of electric. Additionally, the acquisition of Champion International by International Paper may result in a 450,000-square-foot building in Stamford central business district entering the market this year, potentially delaying new construction.
With the average size of available space at 11,000 square feet, smaller requirements can be met in all submarkets, but particularly in Stamford, Norwalk and Shelton. Cost benefits vary in each town, where average asking rents per square foot on a full-service basis are $29.42, $26.64 and $20.81, respectively.
Philadelphia has experienced some exceptional growth in the past six months, with vacancy dropping to a 15-year low of 7.8%. This growth has created a market shift from one long controlled by tenants to one now under the direction of the landlords. The result of this has been a rental rate spike of 10%. A factor of this unbelievable growth is that there is virtually no big blocks of space coming on-line in the near future. The only big block that will become available is 500,000 square feet with the renovation of 4 Penn Center.
The suburban office market is on track to have a record year of positive absorption. First half absorption rate results for 2000 are already greater than the annual totals for nine out of the past 10 years. As a result of this heavy activity, the overall vacancy rate has dropped below 10%. The Class A1 spaces experienced the largest decline in vacancy, from 15.6% six months ago to the current 8.8%, the lowest for all the classes of office space.
Construction and redevelopment activity in the suburbs continues on its high level of output totaling 2.2 million square feet. Although rental rates have not shot up dramatically due to the tight market, landlords are clearly in control, offering few or no concessions in the way of tenant improvements, requiring longer lease terms and only considering tenants with very strong credit.
Excitement tops the bill for the first half of the new millennium in Southern New Jersey. With aggressive leasing activity dominating the first half of the year, the market continues to be landlord-driven, with few, if any, concessions being approved. Although the market is busy, the absorption rate does not reflect this fact because of the sublease and new construction activity that hit the market in the first two quarters of the year.
One direct result of new construction hitting the market is that rental rates have stabilized. But even though the Class A vacancy rate increased, there should be no fear of the market slowing.
Who would have thought that the Keystone Opportunity Zone program would be such a hit for industrial development in Pennsylvania? Just in the past two quarters, two industrial real estate transactions were completed in Philadelphia, bringing more than 1,200 new jobs to the area. T.J. Maxx, a division of TJX Companies, will soon have its 1 million-square-foot distribution center under construction. Developed by Liberty Property Trust, this 67-acre parcel is within the designated KOZ, which exempts companies that create jobs from an array of local and state business and property taxes until 2011. Super-Nutrition Distributors Inc. also opened its new 100,000-square-foot warehouse facility in a KOZ.
Office construction activity continued to rise in the Pittsburgh area with 1,460,000 square feet of speculative product under way in the suburban and fringe markets. Central business district Class A1 direct availability rose from 4.2% to 5.2% in the second quarter, with a full-service, weighted-average direct asking rate of $26.16 per square foot annually. Direct availability in the Class A2 sector decreased further to 15.9%, with a weighted average direct asking rate of $21.41.
Plans were announced to build 500,000 square feet of office space in Cranberry Business Park, a 180-acre development recently sold by Penn Power to Abstract Properties.
Meanwhile, Marconi Communication’s announcement that it will add 1,000 jobs at its Marshall Township headquarters will result in the construction of six new buildings proposed at its RIDC Thorn Hill Industrial Park complex, doubling the space to 750,000 square feet.
The strongest area of new development in the Pittsburgh industrial market comes in the owner-built sector, where the region has experienced both the expansion of locally based companies like Marconi, which are bringing new industrial product to the market, as well as development from transplant companies who are attracted to the area’s workforce, cost of living and local economic development initiatives.
Plans for the proposed US Airways maintenance facility at Pittsburgh International Airport will still move forward even if the merger between United Airlines and US Airways is approved. The new maintenance facility, downgraded to a $160 million project, will contain two new hangars. US Airways’ original plans new construction.
Orion Power Holdings Inc. finalized its purchase of seven local power plants from DQE Inc. The total purchase price was $1.7 billion. Orion plans $45 million in renovations over the next two years to its Brunots Island power plant. Groundbreaking was held recently for the first building, a 60,000 square feet flex structure, in Rockpointe Business Airpark. Thirty building lots will be available in the 270-acre park for light industrial and office users at the Keystone Opportunity Zone location.
MIDWEST
The downtown Chicago office market continues to roll along as large transaction after large transaction continues to be completed. The questions that remain are how deep the market is and how long will it last?
When measured by gross leasing activity and net absorption, a level of health and prosperity has returned to the downtown office market. In fact, the momentum continues to build for one of the best years in commercial real estate activity in the central business district. Through the first half of 2000, gross leasing activity by tenants leasing more than 12,000 square feet totaled almost 9.2 million square feet. Nearly two-thirds of that activity, 6.2 million square feet, was for transactions involving more than 100,000 square feet. There have been 33 of those transactions completed to date in the downtown market.
For those concerned with the depth of the market, at the end of the second quarter there still was considerable activity in the downtown market. Twenty-six companies, representing more than 2,750,000 square feet of prospective transactions, were in the market, looking to find the best location and the best deal. While this is an average of more than 100,000 square feet per prospect, 18 of these potential transactions are for less than 95,000 square feet.
In tandem with these strong leasing statistics, absorption has been strong, eclipsing the 1 million-square-foot mark for the second time in three quarters. Year-to-date absorption totals nearly 1.7 million square feet and the 12-month absorption total is almost 3.4 million square feet.
Toward the end of 1999, there was growing concern that the boom in suburban areas around Chicago was on the verge of going bust. The fundamental principles of economics suggested that as supply continued to grow through new construction (as well as other means) and demand languished, discounts in pricing were sure to follow. Certain segments of the market had begun to experience this in mid-year 1999, when pricing discounts ranged from 5% to 20%, depending on the situation.
Since the beginning of the year, however, those fears largely have been put to rest. The suburban market found its equilibrium in tempered construction levels. This temporary plateau in new construction starts allowed demand to begin to keep pace with supply. In fact, transaction activity throughout the suburban market has been sufficient enough to warrant the addition of several new projects throughout the market.
Perhaps best exemplifying this point is the case of Windy Point in Schaumburg. In mid- to late 1999, the 180,000-square-foot building had lease commitments in place for very little space in the building. This was due, in part, to aggressive pricing. With a return to reality, and a relaxed rental rate structure, a number of leases fell into place,most notably AT & T;/MCI for 90,000 square feet and Global Knowledge for 22,000 square feet.
Recently, Windy Point closed several significant transactions including one that completed the leasing of the first phase of the project. More importantly, however, was the completion of a transaction with Zurich-Kemper Insurance for the entire second phase of the project. In fact, the second phase will total approximately 300,000 square feet to accommodate the company’s expanded needs.
In the suburban market, absorption of space has been on a torrid pace, at least when compared with recent levels. In the second quarter, more than 1 million square feet of space was absorbed,nearly two-thirds of that in the Class A market. Further, year-to-date absorption reached just more than 1.6 million square feet, a back-to-back total that hasn’t been seen in the suburban market in years.
If there is an exception to the suburban market equilibrium, it can be found in the East-West Corridor, and specifically in the Oakbrook Terrace marketplace. This market area continues to reel over a burgeoning supply of space as a result of new construction activity, mergers and acquisitions and corporate relocations. As a result of this space glut, the East-West vacancy rate is 12.4%, nearly double the rate from one year ago. The Class A and Class B rates both have increased substantially, to 12.6% and 14.2%, respectively.
Moving forward for the balance of 2000, the suburban market is not without its concerns. Mergers and acquisitions continue to strike a certain level of uneasiness in the market. There has been recent talk that Fort James Paper, which two years ago completed a large lease in the North market, may be in merger talks. Though too early to understand what that would mean, a large hole in the market like that would certainly have an effect. In fact, it is likely that landlords have more anxiety about mergers and acquisitions than about a bust in the dot-com arena.
Transaction activity within the North Chicago City proper continues to be energetic. The pace of deal absorption is second in the entire metropolitan area, following the very active suburban O’Hare. New development continued to cluster around key demographic locations, and tollway exchanges, especially for logistics companies needing to have access to the coast-to-coast I-80. In North DuPage, Carol Stream, Duke-Weeks Co. has acquired six parcels of vacant land, nearly 30 acres in all, in hopes to meet pent-up demand. The firm intends to develop 1 million square feet of speculative and build-to-suit development.
As we move into the second half of 2000, the Detroit office market continues to sizzle, while projects under construction have tripled since the first quarter. Strong pre-leasing has driven the second-quarter net absorption up to 740,426 square feet, with 176,409 square feet of new product in the construction phase. Class A rents remain stable due to increased demand in both the central business district and suburban markets, and the vacancy rate has dropped to 8.3%. If mid-year statistics are any indication, it looks like 2000 will be a very hot year for the local office market.
The telecom market in Detroit is gaining momentum as Amerimar Enterprises redevelops a Detroit warehouse into a telecom facility known as Net-Works Detroit. The six-story, 650,000-square-foot building is an estimated $292 million dollar redevelopment project that will house equipment to link local users to networks.
The consolidation of MCN and DTE Energy is expected to significantly change the real estate landscape of Detroit’s central business district. Upon the merger, DTE intends to move 900 employees from the Guardian Building to the current headquarters on Second Street. This will leave the 700,000-square-foot building 90% vacant. Suburban activity continues to be primarily characterized by the proliferation of “Automation Alley,” otherwise known as the northern I-75 corridor. Automotive suppliers are rapidly absorbing large blocks of contiguous space in an effort to reposition themselves closer to local auto giants.
The metropolitan Detroit industrial market is experiencing an oversupply of buildings in the major growth areas, such as Farmington Hills. Rents are expected to flatten over the next 12 months, while construction and labor costs are decreasing due to a decline in new jobs. Macomb County is experiencing a shortage of 10,000-square-foot to 20,000-square-foot buildings and an abundance of 50,000-square-foot-plus buildings.
The Cleveland real estate market is on its way to absorbing the more than 1.3 million square feet of office space completed in the past 12 months, with nearly 400,000 square feet of net absorption in the first half. There has been little fluctuation in the overall vacancy rate, which now stands at 12.62%, a slight increase since the second quarter of 1999, when the vacancy rate was 11.23%. The demand for new product continues to fuel the development of new space, but the pace of development is clearly more measured when compared with that of the late ’90s. Nearly 500,000 square feet of space was added to the overall supply in the second quarter, with an additional 750,000 square feet slated for completion in the next 12 months.
Developers remain confident that demand will be steady as they continue to plan for new product. This confidence transcends the concerns by some who believe that the market has reached a saturation point.
The South and East submarkets have shown the most significant increases in vacancy, due in large measure to the timing of recently completed projects available for occupancy within the same quarter. Vacancy numbers are expected to gradually decrease in those markets as a result of commitments made by tenants to lease space in those new buildings.
Cleveland and many inner-ring suburbs have been faced with problems such as a lack of developable land, obsolete facilities and the cost of cleaning up brownfields, which are sites that the Ohio EPA has labeled contaminated. A dwindling supply of land in the perimeter areas of the county is bringing to the forefront the issue of redevelopment in the city. Companies already in the city and looking to grow often find their buildings are inefficient or they are landlocked. The costs of upgrading an existing facility or redeveloping a brownfield site are often prohibitive and some companies opt to leave the city for greener pastures. In an attempt to ease the burden, the Ohio EPA has granted Cleveland an Urban Settlement Designation, for nearly 12,000 acres throughout the city, which waives the costly requirement of cleaning up existing groundwater and brings redevelopment within reach for property owners.
SOUTHEAST
The Washington, D.C. area continued its solid performance through the second quarter of 2000, with strong demand continuing to outpace supply. Of the 17 million square feet currently under construction, approximately half is pre-leased. The metropolitan area economy should have no problem generating enough demand to substantially fill the estimated 8% to 10% increase in total inventory over the next two years.
The average asking rental rate for Class A office space in Washington topped $40 per square foot on a full-service basis. Because of this upward pressure on achievable rents in quality space and the ever-diminishing supply of Class C space, Class B rental rates have surpassed what were Class A levels less than three years ago.
Although Northern Virginia’s net absorption dropped off slightly in the second quarter, the first six months of 2000 have still seen an 8% increase in net absorption compared with the first six months of 1999. Technology-driven Fairfax County, with 41 buildings under construction, continues to see the most activity. The suburban Maryland office market improved on all fronts as well. The overall vacancy rate fell below 9% and although it remains more than double that of Northern Virginia, economic fundamentals are still strong enough to warrant several new construction projects, of which 54% are pre-leased.
With technology as the primary driving force, the Washington metropolitan area’s flex/industrial market continued its outstanding performance through the midyear point. Market indicators have again surpassed all expectations. With an ever-increasing tenant base of rapid-growth start-ups and several notable relocations to the Washington area, new construction can hardly keep up.
The first six months of 2000 saw the delivery of 18 buildings totaling more than 1 million square feet. By the end of the year, another 35 buildings totaling 2.5 million square feet will have brought construction activity to levels not seen in more than a decade. Strong demand for new space is pushing new development farther into the suburbs, with Manassas in Prince William County enjoying most of this high-technology spillover. The pre-leasing level for all new construction stood at 41% at the end of June, and is steadily increasing as more development projects begin. During the second quarter, the overall vacancy rate dropped by half a percentage point, to 6.9%, and is expected to drop further, but less dramatically.
Loudoun County’s remarkable growth spurt continued, reflected in a vacancy rate of less than 1%, and pronounced shortcomings with respect to suitable space for new and/or expanding tenants. Average asking rental rates are spiking across all submarkets and product types. In Northern Virginia, heavy construction activity in the flex sector lifted the average asking rental rate by 11.6% in the past three months alone. Industrial product is performing extraordinarily well, with an average asking rental rate up almost 20% on the year for the entire metropolitan area.
In Richmond, the overall vacancy dropped from 10.5% to 9% with all classes showing improvement. Class A office space is particularly tight with only 4.5% vacancy. Space is so tight in the suburbs that tenants are often motivated to “take the space now … we might need it.” As has been the case in the last several quarters, the bulk of the 908,000 square feet under construction is pre-leased. Absorption continued the pace established in the first quarter, adding another 324,000 square feet and bringing the year-to-date total to almost 550,000 square feet.
Average asking rents are up a little from the first quarter for both Class A and Class B space. Property owners in Innsbrook, where large blocks of Class A space are scarce, are able to maintain record high rental rates on both renewals of existing leases and leasing of first and second-generation space. In most cases, owners are able to sustain existing lease rates at renewal, usually $17 to $19 per square foot. Re-lease space in multi-story Class A buildings in that submarket are in the range of $17.50 to $19 per square foot. With a minimal amount of new inventory under construction that is not already committed, these rental rates will likely maintain their current levels or increase slightly by year’s end.
The downtown submarket has been steadily improving and has received considerable interest from both dot-com companies and switch centers. Most of the interest lately has been from those tenants seeking non-traditional “bricks and exposed beam” environments found in the older buildings undergoing rehab in the Shockoe Bottom and Shockoe Slip areas, rather than the traditional multi-tenant high-rise office buildings.
Flex/warehouse leasing, building sales and build-to-suits in the 15,000 square feet to 50,000 square feet range have exhibited the most activity. Several entities with requirements of 500,000 square feet or more have been looking to build in the area. With a few exceptions, speculative development has stalled as developers wait for the market-wide overhang to burn off.
The Atlanta economy, boosted by continued high-tech business expansion and migration, is expected to create over 85,000 jobs this year. Many of these growing companies have moved into space in the in-town markets of downtown, midtown and Buckhead and have reduced the vacancy rates in these markets to 6.4% in the second quarter.
The lack of space in town is likely to lead to new development and downtown will benefit from an announced $1.2 billion expansion by Turner Broadcasting that will create 3,800 new jobs and include a 600,000-square-foot, 25-story office tower. In addition to the increased demand for office space in the in-town markets, the overall vacancy rate for Metro Atlanta fell from 11.4% to 9.9%; the three major suburban submarkets of North Fulton, central perimeter and northwest each had vacancy rate reductions of almost two percentage points.
The 2 million square feet of office space absorbed during the second quarter brought the year-to-date absorption total to 4.3 million square feet, and this ranks Atlanta among the top four cities in the country. North Fulton led all submarkets with second-quarter absorption totaling over 661,000 square feet. According to one prominent developer, “this market will continue to dominate because it addresses the fundamental need to put office space closer to the major residential bases.” This close proximity to the major residential bases will also boost growth in the central perimeter and northwest submarkets.
The current economic expansion is the longest in U.S. history and its effects continue to be felt in Central Florida. However, it is expected that a modest slowing of construction starts, absorption, rent growth and overall returns will appear soon in the Orlando market. More than 1.8 million square feet is under construction in the market, which is considerably lower than the 2.5 million square feet that was under way this time last year. Vacancy rates will continue to rise slightly, but the overall market should maintain good equilibrium.
Demand remains strong as a result of the robust local economy. Since the first of the year, the market has seen net absorption of over 800,000 square feet; however, only 117,923 square feet was absorbed during the second quarter. This discrepancy is primarily due to existing tenants relocating to new properties, a trend that will continue as new buildings open in the market. Vacancy rates are rising as a result of new construction. Tenants are beginning to see more leasing options and increased competition between developers is returning to the market. Landlords will continue to record rent increases in excess of inflation, but growth rates will slow from those of recent years.
Three significant telecom facility projects are under way or have opened recently totaling nearly a half-million square feet. A former J.C. Penney department store in downtown is being converted into the area’s largest telecom center with four stories and 154,000 square feet. New construction of warehouse-distribution space remains active, with more than 1.5 million square feet under way.
Through the second quarter of 2000, an already tight office market in Miami-Dade became even tighter, as the overall vacancy rate declined to 8.6%. Interestingly, both the central business district and suburban markets ended the quarter with the same vacancy rate. The current rate marks a significant improvement over the same period a year ago, when the market had a vacancy of 12.8%. The tight market conditions have pushed rental rates in the opposite direction, as tenants compete for fewer and fewer spaces. At the end of the second quarter, the overall average annual rental rate was $22.19 per square foot, a 10% increase over a year ago.
The shortage of Class A space has reached a critical point in Miami. At 7.0%, it has the lowest vacancy rate for all classes of space. In the central business district, it is a mere 6.1%, whereas the suburban markets have 7.7% of their space vacant. As might be expected, tenants in Miami are paying a premium for Class A space,an average of $27.43 per square foot. Those who prefer to lease space in Class A buildings but find themselves squeezed out of the market have turned to Class B buildings. The result is a single-digit vacancy rate in the class B market,9.4%,and an average asking rental rate of $20.30 per square foot.
But relief is in sight. At the end of the quarter, almost 2.6 million square feet of space was under construction, compared with 1.2 million square feet a year ago. Of the total, 980,000 square feet are in the central business district, while the remaining 1.6 million square feet are in the suburban markets. In addition, at least another 725,000 square feet is planned for the near future.
