SEATTLE
After a steep decline in vacancy during the second quarter, the Puget Sound office market took a breather this quarter as the overall rate remained relatively unchanged, ending at 9.6%. While the national economy is not yet out of the woods in terms of sliding into a mild recession, the local economy continues to be healthy.
Many areas around the country are seeing home prices fall; in Puget Sound appreciation rates are slowing, but remain on the plus side. According to the Puget Sound Economic Forecaster, job growth should remain at 2% to 3% through 2008, still well above the national average. Boeing Co. and Microsoft Corp. continue to add jobs and, in the case of Microsoft, lease large amounts of new space.
Despite sluggish activity in the third quarter, landlords in Seattle and especially the Eastside continue to strengthen their negotiating position and projects under construction are seeing healthy preleasing activity, reducing the amount of available space on the market.
Both class A and B overall average asking rates rose sharply again in the third quarter. Class A asking rates jumped nearly $2 per foot. Class B asking rates rose by 64 cents to a six-year high of $2.03.
PHOENIX
Sustained demand and the lack of new space coming online will drive rents higher and vacancy lower across most submarkets in the region.
The Phoenix market is relatively balanced as new tenants enter the market and established tenants expand. Developers keep construction levels up to supply the tenant demand.
The Phoenix economy continues to outpace national levels as the local job market and population experience continued growth contributing to a healthy office market.
The Phoenix vacancy rate remained virtually flat at 15%.
Vacancy should rise slightly as developers deliver new buildings throughout the valley. Down from earlier quarters, construction levels still sit at a healthy 3.3 million square feet and more than 12 million square feet of space is either in the planned or proposed stage. Nearly 2.7 million square feet of new space has been completed in the first three quarters and an additional 1.2 million square feet will be added by year’s end.
For the remainder of the year, as new product becomes available, developers must continue to raise their rental rates to cover the rising construction costs.
LAS VEGAS
As the Las Vegas professional office market reaches almost 30 million square feet, the challenges of rising construction costs and land availability are expected to be offset by anticipated job growth from numerous hotel/casino and large-scale retail projects.
About 830,000 square feet of office space was completed in the third quarter, offering many opportunities for tenants looking for new class A and B space. These projects contributed to the rise in vacancy this quarter, although some projects were substantially preleased when completed.
The downtown submarket attracted much attention in the third quarter, as the historically low vacancy rate jumped 760 basis points to 8.2%.
Lease rates for class A space have risen significantly,due, in part, to the 700,000 square feet of class A product delivered to the market this quarter,while class B rates have remained steady. While many landlords are still offering free rent and other concessions to lease up their space, lease rates are expected to climb slightly by the end of the year.
Analysis by Grubb & Ellis Co.
