In the United States, office occupancy growth and rental rates saw some progress in the 2nd quarter. Office rents experienced a 2 percent increase in the first half of the year. While still not ideal, it is more momentum than was seen in the first half of 2012 when rents increased by 1.7 percent. The increase in rent should lead to stronger net operating income for investors in office properties as leases expire and are renegotiated at the current higher rates.

National office vacancy also inched closer to 12 percent in the previous quarter. On a more local level, 61 percent of U.S. submarkets have seen a decline in vacancy rates. Over the past year, national vacancy has moved from 12.7 percent to it’s current state at 12.1 percent. The positive news is that it is heading in the right direction, closer to the 11 percent mark needed for a healthy office vacancy rate. However, at the current pace, most forecasters do not expect that mark to be reached until around 2016.

On the downside, there are also several negative indicators for the office market. For example, the historically low rates of new office construction, which most believe are assisting in the decline of the national vacancy rates. Once the demolition of obsolete office space is factored in, net office completion only grew by 5 million square feet or 0.06 percent of nationwide office inventory. Demolition of office space is also playing a role in the decline. The country has seen a decrease of 80 million square feet in office inventory.

If the office market does see a pick up in activity any time soon, the key factor will end up being the jobs recovery. While corporate profits have seen all-time highs, companies have been adding more workers, which means that they will soon need to start leasing more space. An initial worry we had when discussing the challenges of the office market was that the modern worker would not commute to an office, but instead work from home as an independent contractor. For now, however, office-using employment growth has been outperforming the results of the broader job market.

For more on the current office market, take a look at this piece by Mark Heschmey in which he discusses some road blocks to closing deals on office investment properties.

Advertisements