Jones Lang LaSalle

Office Vacancies Fall, Rents RiseAmid Positive Signs for Landlords
By JENNIFER S. FORSYTHApril 6, 2006; Page A2

Vacancies in U.S. office buildings fell to the lowest level in five years, reaffirming an improving market that is allowing landlords to boost rents.

The office vacancy rate for the 69 largest metropolitan markets dropped to 14.1% in the first quarter from 14.7% in the fourth quarter of 2005, the steepest percentage-point drop in at least seven years, according to a survey by Reis Inc., a New York-based commercial-real-estate research firm. The eighth consecutive quarterly drop resulted from continued strong absorption -- the net change in occupied space -- totaling 15 million square feet in the first quarter.

With those trends, landlords were able to raise effective rental rates -- the negotiated price after concessions to tenants -- an average of 2% in the quarter, the largest increase in 5½; years. Taken together, the increases signal "a very favorable shift in momentum" in the office market, said Reis Chief Executive Lloyd Lynford.

Another positive sign for landlords: Rent concessions, such as a period of no payments, declined to an average 15.5% discount from a high of 19% in the fourth quarter of 2004.

The nationally aggregated numbers mask the uneven distribution of the office recovery. In the 10 markets with the lowest vacancy rates, effective rents grew 5.7% for all of 2005 and 3% in the first quarter of this year. By comparison, in all other markets, effective rents climbed an average of 1.9% last year and 1.5% in the first quarter of this year.

The West Coast and the East Coast continue to benefit from international trade, job growth and steeper barriers to entry in some markets where construction is constrained. The Midwest and the South lag behind. Landlords in Cleveland and Pittsburgh, as well as the Carolinas cities of Greensboro, Charlotte and Columbia, actually lost ground on effective rental rates during the quarter.

One market with a noteworthy turnaround is Phoenix, which Reis said had the largest increase in effective rent in the past three months. Office space has been in demand there because of strong job growth, particularly in finance and insurance, said Phoenix-based Mike Beall, senior director for commercial-real-estate-services firm Cushman & Wakefield.

Also helping Phoenix is that office developers have been fairly restrained in their building, with only about one million square feet of new office space added in all of 2005. Mr. Beall notes that 2.6 million square feet should be completed in 2006.