It seems as though it has been a couple of weeks of good news for the US office space market.  CoStar has just come out with their State of the U.S. Office Market: Mid-Year 2010 Review & Forecast.According to their study, office space vacancy rates have stabilized and office vacancy rates that appear to have peaked and are no longer on the rise .

A few notable points from the report:

Office job growth has spurred positive net Office Space absorption. Office Vacancy Rates have peaked with some office markets even reporting Increases in average office Rents.

Of the 20 largest office markets, eight of them posted positive net absorption so far this year, three of them had little or no change, but nine did post negative net absorption. Washington DC led the country with 2 million square feet of net absorption followed by Denver with 1.6 million and Minneapolis with 1.3 million. New York City had 2.8 million square feet of negative net absorption, Los Angeles with a negative 2 million and Philadelphia at negative 1 million. But even the markets experiencing negative absorption were doing so at much reduced levels compared with last year.

New York, Long Island and Minneapolis office space markets are all now reporting single-digit office space vacancy rates of 9% or less.

If the current pace of office space absorption and delivery trends hold, CoStar projects the office vacancy rate will go from 13.6% to less than 11% sometime in 2013.

From a commercial real estate perspective, as long as you have any net job growth, it is eating away at the vacancies out there. The most important thing here is that this positive employment growth in the office sector will be reducing standing inventories of (available) space.

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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."

POLICOM releases annual rankings for the 366 metropolitan areas and 576 so-called micropolitan areas nationwide.

The Top Ten Economies

1.Seattle-Tacoma-Bellevue, Wash.
2. Washington Metropolitan Area
3. Denver-Aurora-Broomfield, Colo.
4. Houston-Sugar Land-Baytown, Texas
5. Sacramento-Arden-Arcade-Roseville, Calif.
6. Salt Lake City
7. Des Moines-West Des Moines, Iowa
8. San Diego-Carlsbad-San Marcos, Calif.
9. Madison, Wis.
10. Dallas-Fort Worth-Arlington, Texas

Understanding the Rankings

Download the complete report

With their stronger economies, these are the office space markets that we would expect to lead the recovery.

January 8, 2010 WSJ - The office market in Washington, D.C., is poised to topple New York as the nation's most expensive, reflecting the declining fortunes of the nation's financial center and the government expansion under way in the U.S. capital.

Rents declined in almost all of the 79 American cities tracked by Reis Inc., a New York based-research firm, in the fourth quarter of 2009. The largest fall was in New York, where average effective rents -- or the net amount tenants pay after landlord concessions -- fell nearly 20% to $44.69 per square foot annually. It was the sharpest decline in rents ever recorded by Reis since it began compiling data in 1981.

By contrast, average rents in Washington were $41.77 per square foot, down 3% annually. Reis estimates that by the end of this year, rents in New York will come down to around $41.07, slightly below their estimates for Washington of $41.27.

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Washington Business Journal Thursday, November 19, 2009: The initial U.S. commercial real estate recovery is likely to begin in the second half of next year, according to Jones Lang LaSalle’s 2010 forecast.

Nationally, leasing demand levels are expected to bottom out this quarter and remain stagnant next year. And national office vacancy are expected to near 20 percent by late 2010.

D.C., which has a 12.3 percent vacancy rate that includes sublease space, is expected to come close to topping out at about 15 percent before stabilizing, said John Sikaitis, research manager in the D.C. office of JLL.

“We have significant supply issues with a large development pipeline but significant demand with the government looking to mitigate the problem,” said Sikaitis.

Expected boosts in the federal budget will continue to cushion the D.C. office market and shift absorption back into positive territory in 2010.

But the continued delivery of speculative construction projects in the area is expected to force vacancy rates further upward and keep leverage squarely with tenants, said JLL.

The D.C. area’s 15.5 percent vacancy rate is expected to escalate to 17 percent by the end of 2010.

Northern Virginia’s rate of 16.5 percent is expected to go up slightly to 17.2 percent and in suburban Maryland, its 18.5 percent rate is expected to go up to north of 19 percent, added Sikaitis.

One region that’s fairly tight, he said, is the Rosslyn-Ballston corridor which “outperforms the rest of the region” based on the lack of development activity and tenant demand from D.C. and areas outside the beltway.

Rental rates are expected to keep dropping through the first half of 2010 but will stabilize in the third quarter due to pent-up federal demand soaking up large blocks of vacancy in the market, said JLL.

The region’s asking rents have already come down about 12 percent since the height was established at the beginning of 2008, he said. Effective rates -- which includes rental concessions -- have come down even further, at 20 percent, and are expected to see a 25 percent decline.
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It looks like conditions will get really ugly in the DC area before a turnaround, even if JLL is correct on a recovery mid 2010.