The office vacancy rate in the US is the highest it has been in 17 years, since 1993. Effective rents were lower in the 2nd quarter as the office space market continues to struggle. It is not all bad news. The negative trend is slowing.  In other words the vacancy rate is increasing at a slower rate and the bottom may be in site.

According a study published by the National Real Estate Investor magazine, "There is reason to be optimistic about the fate of office properties. A turnaround may yet happen later this year, but the real recovery will come to fruition next year"

This is the second recent report of positive news in the Office Space arena. Just a few days ago we posted Office Space Vacancy Rates in US CBDs Fall Slightly, now this. Hopefully it will be the first few of more to come.

WASHINGTON, July 12 /PRNewswire/ -- For the first time in two years, the demand for office space exceeded what was returned to the market, according to Cassidy Turley's latest National Office Trends Report.

Cassidy Turley reports that with demand up, national office vacancy rates remained flat when compared to the previous quarter at 16.9%. Still, this is the highest vacancy has been since 1993. Of the 80 major metros tracked, 40 posted increases in vacancy and 35 markets posted declines.

According to the report, national rents are stabilizing, but not appreciating. Average asking rents fell slightly, down $0.17 compared to the pervious quarter, to register at $21.56 in the second quarter of 2010.

"In terms of recovery in the office market sector the fundamentals have improved, the demand has improved - especially in Washington, DC, New York City, and pockets of California," said Kevin Thorpe, Chief Economist at Cassidy Turley. "These are the segments of the market that are clearly outperforming the rest of the country. Investors are targeting quality assets in these markets and pricing has moved up dramatically from the low point it hit in 2009."

According to Cassidy Turley, the U.S. economy created 116,000 office-using jobs in the second quarter of 2010.  However, recent economic data suggests that the economy may be losing steam as we enter into the second half of 2010.  Private sector job creation, in particular, has been disappointing in the May and June employment reports. Even under bullish economic scenarios, unemployment will not reach pre-recession levels prior to 2013.

Cassidy Turley reports that U.S. office sales volume is up 39% compared to this same period one year-ago – at $7.42 billion. Net absorption was positive 6.6 million square feet in the second quarter of 2010, marking the first period of positive demand since the first quarter of 2008.

The report also finds that the development pipeline has slowed dramatically.  There is currently 32.8 million square feet under construction, compared to 41 million square feet delivered in 2009 and 61.1 million square feet delivered in 2008.

"The growing uncertainty regarding the recovery and surrounding the regulatory environment will slow the recovery in the office sector, but it will not derail it," added Mr. Thorpe.  "Office-using job growth will continue to be slow in 2010, but as businesses regain confidence in the self-sustaining expansion, hiring will pick up in greater numbers in 2011 in order to keep pace with growing demand.  For the office market, 2010 will be the year of positive demand for office space, 2011 will be the year of stabilizing vacancy, and 2012 will be the year of rental appreciation."

Bloomberg July 8, 2010 - Office space vacancies in U.S. central business areas fell in the second quarter from the prior three months, the first drop since 2007, as companies hired workers and took advantage of lower office space rents, Cushman & Wakefield said.

The average vacancy rate in central business districts fell to 14.8 percent from 15 percent at the end of the first quarter, the New York-based broker said today. Sixteen of the 31 cities tracked by Cushman had declines in vacancies, the company said.

“Markets throughout the U.S. continue to strengthen, as it becomes strongly apparent that the national vacancy rate for CBDs has peaked,” Maria Sicola, executive managing director and head of Americas research for Cushman, said in a statement.

Office vacancies in both central business districts and suburban areas rose to 17.4 percent in the second quarter, the highest since 1993, New York-based research company Reis Inc. said July 6. Cushman’s figures are for central business districts in cities including New York, Washington, D.C., Philadelphia, Boston and San Francisco.

Some office landlords cut their rents to fill space, Cushman said. The average rent fell to $36.49 a square foot from $36.88 in the first quarter. Nineteen of the 31 districts covered in the survey had quarterly declines in rates and 13 of those had drops of less than 3 percent, a smaller decline than in past quarters, Cushman said.

‘Nearing Bottom’

“While there is still substantial competition among landlords to offer the best deal to prospective tenants, rental rates are nearing a bottom in several markets,” Sicola said.

The U.S. has added 882,000 jobs since the beginning of the year, according to the Labor Department. The drop in office vacancies in the second quarter followed nine straight increases dating back to the last three months of 2007, when the rate bottomed out at 9.7 percent, Cushman said.

Manhattan’s three submarkets -- Midtown, Midtown South and Downtown -- had the lowest vacancy rates among the central business districts tracked by Cushman. Midtown South’s vacancy rate fell to 9.3 percent from 9.9 percent in the first quarter, Downtown’s rate was little changed at 9.9 percent and Midtown’s rate declined to 11.5 percent from 12.6 percent.

Get help finding office space

With office space vacancy rates at recent time highs, office rental rates down as much as 30% in many office markets and no bottom found in the woes for office building owners, now is a great time to renegotiate your lease. Even if you have 2 or more years left on your current office lease you may be surprised at the willingness of landlords to renegotiate. It is not a market specific phenomena, but one that is nationwide. It doesn't matter if you lease office space in Manhattan, Chicago, Houston, Denver, Los Angeles or even small markets such as Fresno, Raleigh or Rochester. Every office space market has been affected.   Many office building owners are having financial difficulties not only on the occupancy side, but also on the mortgage side. If a landlord has a refinance coming due, you may find yourself in a great position to blend and extend.  What this means is that you would extend your office space lease for another 3 to 5 years at a lower rate in order for the landlord to show to their office building lender that they have long term office space tenants.  No office building owner will agree to reducing a financially strong tenant's rent, unless the restructured agreement provides them with some sort of economic benefit. In this case while you are paying less rent, it turns out to be a win-win situation since your new lease will help in the refinance process for the office building owner.

How do you get this process started?
The best way is to contact your Local OfficeFinder Office Tenant representative. Office Tenant Representative services won’t cost you anything and they are professionals at negotiating office leases. OfficeFinder Office Tenant Reps average over 12 years of experience and many have advance designations earned though demonstrating their skills and knowledge. It is a no lose proposition for you. Give them a try. There is no obligation.

We think we have it tough in the US with vacancy rates in the mid to upper teens.

According to a report in ArabianBusiness.com, "Office vacancy rates in Dubai are expected to exceed 50 percent over the next year as new supply continues to be released, a new report by Jones Lang Lasalle has said. The study said city-wide vacancy rates have increased to around 38 percent with levels set to rise further."

By comparison, the US is in pretty good shape. Even Detroit has an office space vacancy better than that; at around 30%. The deals being made in Dubai must be pretty spectacualr with a vacancy rate that high.