WESTERN REGION Vacancy Rates, Avg. Lease Rates
San Francisco office leasing demand has turned positive for the first time in two years, resulting in an overall vacancy rate decline to 21.9%.
In addition to positive net absorption of some 127,000 square feet during the third quarter, gross leasing activity maintained the relatively robust pace established in the prior quarter and recorded 1.3 million square feet this quarter.
Lease rents continued to decline, but, for the second consecutive quarter, the rate of decline was cut by nearly half to minus 3.25%. Average yearly asking rents currently are $30.22 per square foot for class A and $21.69 per square foot for class B.
The amount of vacant sublease space also showed improvement. It declined during the quarter and currently represents 35% of total vacant space, vs. 50% at the start of 2001. Combined, these indicators suggest that the bottom of the market is near.
Although this is the best quarterly market data in two years,and a clear indication that light at the end of the tunnel is beginning to appear,it must be put in proper perspective.
There’s about 14 million square feet of existing vacant space and nearly 900,000 square feet of soon to be completed new space. Meaningful new job growth is not expected to return until mid-2003 and much of the increased leasing activity has resulted from internal movements, rather than truly new demand.
Moreover, the increasing proportion of vacant space in the hands of owners is not all good news and it could result in greater competition for tenants and put downward pressure on rents. We have seen the worst and the market is turning for the better, but sustained recovery is not just around the corner,it appears to be two to three years away.
Albuquerque
After four consecutive quarters of rising vacancy rates, the Albuquerque metro office market stabilized with a half percentage point vacancy decrease in the third quarter. This trend was driven by positive absorption of large sublease spaces and several charter and trade schools occupying almost 35,000 square feet.
Austin
Although Austin’s office market posted positive absorption of nearly 400,000 square feet, there is a growing issue of construction in Austin. The recent “growth” is the result of changes in supply rather than demand as 566,229 square feet was added to inventory in the third quarter. In a market already laden by large amounts of sublease space, the addition of vacant new product only serves to delay the recovery of the Austin office market.
Bakersfield
New construction driven by build-to-suits and preleasing within the University Centre submarket continue to dominate the explosive growth of office developments in Southwest Bakersfield. ChevronTexaco Corp.’s recently completed 150,000 square foot office complex at Three University Centre, a 120-room Homewood Suites by Hilton and various medical and dental office developments are under construction for completion during the second quarter. Planned office developments in the Riverlakes community of Northwest Bakersfield will add another 50,000 square feet of professional office space by the end of the second quarter
Dallas-Fort Worth
While area unemployment is dropping, it still stands above the Texas average at 6.9%. There is nearly 1.2 million square feet of speculative office space under construction in the Metroplex. For the first time in 18 months, Dallas saw a decline in available office sublease space. But the Metroplex still is home to 9.2 million square feet of office sublease space. The Far North Dallas submarket posted 111,720 square feet of absorption in the third quarter as General Electric Co. and Fujitsu Ltd. moved into the recently completed Hall Office Park
Denver
Denver’s office market still is reeling from the implosion of the tech, telecommunications and financial services sectors in late 2001. Vacancy rates have escalated throughout the metropolitan area as tenants have dramatically reduced their office space needs. New office developments that were initiated prior to the market collapse sit empty along with other projects that once were fully occupied. Numerous layoffs have occurred in all types of industries and more loom.
Eugene
The office market continues to slide into negative absorption with few if any tenants entering the market. The major impact is relocations taking advantage of subleases and moving incentives when available. Sale of buildings continues to be brisk when they become available, vacant or leased if priced appropriately, impact of 1031 exchang emoney and cash in marketplace keeps the price up above return value in most cases.
Fresno
Leasing activity is down this quarter, but small office building sales have surged in the past couple of months. As the leasing market picks up rental rates should increase.
Honolulu
The negative absorption trend slowed during the third quarter and asking rents held steady. The volume of leasing activity was at record levels with six deals each more than 10,000 square feet. Net absorption was negative for the total market, though the central business district recorded its first positive net absorption figure of the year.
Houston
Despite soft economic conditions and weak tenant demand, the Bayou City bounced back with 180,490 square feet of positive absorption. Taking Enron Center South into the equation, the vacancy within the central business district increases to 14.1%, due to the forthcoming change in tenant-ownership status from owner-occupied to multitenant.
Las Vegas
Office vacancy at 15% and unemployment at 5.3% are unchanged from the second quarter. The office market is experiencing high vacancy levels, sluggish absorption and slowing new construction. The pipeline for development is slowing due to a strong tenant market which has made investors and developers wary of beginning new projects unless they are substantially preleased.
Oakland-East Bay
The sublease rate still is hovering around its historical high of 6%, equaling 3.5 million square feet. But for two consecutive quarters the sublease rate remained virtually flat. An indication that businesses have slowed down the pace in which they are shedding excess space into the market.
Portland
Despite the numbers, tenant activity has picked up slightly, but only in the 3,000 to 7,000 square foot range. Economic news remains uncertain with the ongoing war on terrorism, a possible Iraqi invasion and mixed economic signals. The office market continues to suffer and has seen another full point increase in vacancy. There has been a subtle shift this quarter with activity picking up slightly. But most leasing for the next several quarters will be coming in the form of smaller deals and from traditional business services.
Sacramento
Net absorption was a negative 60,000 square feet. Vacancy was up to 14%, and sublease availability inched up to more than 750,000 square feet. The Sacramento office market suffered a setback during the third quarter, losing yardage in virtually every category used to measure the market’s health. Net absorption was a negative 60,000 square feet. Vacancy was up to 14%, and sublease availability inched up to more than 750,000 square feet, or 12% of our total available space.
San Jose
The office market is continuing to feel a ripple effect from the hard hit industrial market, leaving Silicon Valley in a catch-22. Because of Silicon Valley’s tech-rich base, it’s overall success depends greatly on office users expanding and buying more equipment. But because the tech companies are floundering, there is no need for the office users whose businesses support them. Housing prices remain high, discouraging any new businesses to relocate to the area. With layoffs continuing to rise, our recovery is three to five years off.
Seattle
Leasing activity in the third quarter consisted mainly of space renewals and lateral moves into higher quality space, with little change in overall occupancy. Washington currently boasts one of the highest unemployment rates in the nation and Seattle is expected to lag behind a national recovery. As vacancies increase, tenant concessions will become even more aggressive and effective rents will move lower until companies begin to expand and there is positive net absorption.
