Federal Reserve Beige Book Summary
"Reports on commercial real estate markets indicated that demand for
space remained weak and that construction continued to decline in all
Districts. Atlanta, Philadelphia, Richmond, and San Francisco reported
that vacancy rates increased, while rates held steady in the Boston and
Kansas City Districts and were mixed in New York. Boston, Dallas,
Kansas City, Philadelphia, and Richmond commented that the demand for
space remained weak. Commercial rents declined according to Boston,
Chicago, New York, Philadelphia, and Richmond. Rent concessions were
reported in the Richmond and San Francisco markets, and Richmond noted
that some landlords had postponed property improvements in an effort to
conserve cash. Construction remained at very low levels, with modest
improvements noted in public construction in the Chicago, Cleveland,
and Minneapolis Districts."
OfficeFinder does not expect much improvement in occupancy until the employment figures turn very positive and positive office absorption can take place again. We are hoping to see some improvements by the middle of 2011.
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Texas is certainly taking some hits while the economy in the US as a whole is suffering. It is certainly not hurting to the same extent. DFW is the 4th largest metro in the US, but it created 83,600 new jobs in 2007 (3rd in the nation) and 54,300 from September 2007 to September 2008 (2nd in the nation). Unemployment stood at 5.3% while the country as a whole was around 6.1%. These numbers may be adjusted later as often happens, but they show that it’s a good time to be in Texas.
Costar reported that the 3rd quarter of 2008 ended with 16.6% vacancy in the office market – a slight 0.1% increase over the 2nd quarter’s ending rate. While absorption year-to-date posted a positive 2.8 million square feet, vacancy is expected to increase as the economy slows and 6.2 million square feet of new properties are delivered. Subleases are becoming more of a factor as well with 2.6 million square feet now available. As sublease space increases, greater pressure is put on landlords to decrease direct rental rates to compete.
What does this mean for corporate tenants? There will be more options for tenants for sure. And it probably makes sense to start testing where the bottom is for rental rates. For example, I recently completed a transaction where the landlord originally quoted $11.20 per square foot. When I told him that the high-credit, international tenant was focused on another building he continued to pursue the deal anyway and eventually made an offer at $9.05 with a construction allowance 25% higher than the original offer. He got the deal.”
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