CoStar: In a Surprise, Office Market Posts Unexpetedly Good Results

By Mark Hershmeyer


Whether a Bounce or Rebound, U.S. Markets See Positive Absorption in Fourth Quarter, Set


Stage for Potential Recovery

Even though the overall number of U.S. jobs continued to disappear through December of last year, the
U.S. office market unexpectedly posted positive net absorption for the quarter. The most likely explanation is that jobs in the office sector increased. According to federal government jobs data, office sector employment increased for the fourth consecutive month in December, increasing by 48,000 jobs. Even the financial sector posted its first increase in employment since July 2007 adding 4,000 jobs in December. Since the end of August, office-using employment is up 154,000 jobs. "This is simply the most important news in the office market in the last 18 months and that has set the potential for recovery in the office markets." said Andrew C. Florance, founder, director, president and CEO of CoStar Group Inc. in his surprisingly upbeat quarterly assessment of the U.S. office market this past week.

CoStar data shows a concurrent increase in total leasing activity last year. Gross leasing activity increased from about 60 million square feet of activity in the first quarter of 2009 to what is expected to be more than 90 million square feet in the fourth quarter.

The U.S. office markets posted about 6 million square feet of positive net absorption, Florance reported in CoStar's quarterly State of the U.S. Office Markets webinar. And the return to positive absorption came about two quarters earlier than expected due in part to the better than expected labor numbers, Florance added.

Florance stopped short of calling the results a rebound and referred to it as "a cessation of bad news" and told listeners not to expect a return to big gains in net absorption anytime too soon. In its 2010 Predictions presented this week, CoStar subsidiary PPR (Property and Portfolio Research), echoed that theme and warned that the market could still see negative net absorption.

"While the economy appears to be stabilizing, it will take a while for this to flow through to the office market," Josh Scoville, director of strategic research and editor of the report wrote. "Due to the lag between GDP growth and hiring, this property type has the longest lag between economic improvements and an increase in demand. PPR does not anticipate a resumption of job growth at the national level until the second half of 2010, and the recovery will be tepid at first. Although things should start looking up in the latter half, expect net negative absorption in 2010."

The modest fourth quarter bump in absorption helped the national vacancy to level at about 13.1%, Florance said. However, the total office space availability rate was still increasing and was approaching almost 18%. Florance said this additional supply of under-utilized space is going to mute any dramatic increase in positive absorption in the short-term.

Another downside CoStar reported in its analysis is that office rents will continue to fall even as demand might be stabilizing. This was a rough year for office landlords, PPR reported, as asking rents declined by nearly 10% on average. "While landlords in some markets (such as New York, San Francisco, and Orange County) have been quick to lower rents, most have been holding out on face rents as much as possible and relying more on concessions to get tenants in the door," PPR reported. "But this will not last forever, and as office owners come to terms with reality in 2010, asking rents will be slashed. As distressed assets are scooped up, new owners with lower debt obligations will be able to undercut the competition, pulling down market rents."

While nationally office markets showed positive net absorption, regionally, there were big differences. The Northeast states lead the nation with about 4.8 million square feet of positive net absorption. New York City posted 1.6 million square feet; Philadelphia 900,000 square feet; Northern New Jersey, 600,000 square feet; Long Island, a half of million.

Across the country on the West Coast, though, Orange County California posted negative net absorption of 1 million square feet; and San Francisco, 900,000 square feet. Washington, Oregon and California combined had negative net absorption of about 2.1 million square feet.

Atlanta with negative net absorption of 500,000 square feet brought down the Southeast's numbers. The Southeast states posted about 11,000 square feet of negative net absorption in the fourth quarter; that compares to positive net absorption of more than 5 million square feet in the third quarter.

Minneapolis with 400,000 square feet of positive net absorption carried the Upper Midwest to a net gain of 436,000 square feet; and the Mountain West states showed 778,000 square feet of net absorption, led by Denver with 600,000 square feet of positive net absorption.

Washington, DC, with 900,000 square feet of positive net absorption carried the Mid-Atlantic region and boosted positive net absorption in that region to 1.35 million square feet.

The Midwest states had a net loss in occupancy of 527,000 square feet. Detroit alone posted a negative 1.6 million square feet of net absorption.