Demand for U.S. office space hit a 17-year low in the second quarter and could dip further this year, as companies remain reluctant to hire more employees amid economic uncertainties, according to real estate research firm Reis Inc.
"It's nearing the bottom," Reis economist Ryan Severino said. "It's a little hard to say that we're at the bottom. It probably will take another quarter or two to know for certain."
The U.S. office vacancy rate reached 17.4 percent in the second quarter, a level unseen since 1993 during the last U.S. commercial estate implosion, according to preliminary figures Reis released Tuesday. That compares with 12.5 percent in 2007, when demand was the strongest in recent years.
Demand for office space is a function of confidence in the U.S. economy, and so far the recovery has been in fits and starts.
Lethargic job creation, a weak U.S. housing market and concern about Europe's economy have left companies unwilling to commit to signing leases to accommodate future hiring.
The third quarter also does not look strong, as the most recent jobs report Friday showed that overall employment fell for the first time this year. That came on the heels of reports of sharp drops in consumer confidence and new home sales.
"When things do turn around, it will be a slow, somewhat tepid recovery, just because of the way the economy is likely to recover," Severino said. "Hopefully, the economy proceeds on this slow, meandering course as opposed to retrenching back into a recession."
The U.S. office vacancy rate rose 0.10 percentage point from the first quarter and 1.4 percentage points from a year earlier, Reis said.
Companies let go of about 1.8 million square feet of office space during the quarter, fueling the vacancy rise, Reis said.
Vacancy has climbed 4.9 percentage points from its low reached in the third quarter 2007, Reis said.
Still, the second quarter marked the 10th consecutive quarter since the beginning of 2008 that office properties registered deterioration in the level of occupied space. The office vacancy rate increased in 49 of the 82 metropolitan areas Reis tracks.
Like the occupancy rate, the average U.S. rent continued to deteriorate at a slower rate. Asking rent fell 0.2 percent from the prior quarter and 3 percent from a year earlier to $27.47 per square foot, the lowest level since the 2007 second quarter, Reis said.
Factoring in months of free rent and other concessions, the average national rent fell 0.9 percent from the prior quarter and 5.7 percent from a year earlier to $22.01 per square foot.
It was the lowest level since the third quarter 2006.
That rent, called effective rent, declined in 60 out of the 82 markets, up from 56 the prior quarter, reflecting landlords' concerns about demand for space, Severino said.
In New York, the largest U.S. office market, the vacancy rate held firm at 11.7 percent. Effective rent continued to slip, down 0.1 percent to $43.66 per square foot. Even so, it was a marked improvement over the prior quarter, when effective rent plunged 2.2 percent.
"It's a sort of 'less negative is the new positive,"' Severino said.
Washington, D.C., was the tightest market, with a vacancy rate of 10 percent. On the other end of the spectrum, Detroit had the highest vacancy rate at 26.3 percent, as it continues to reel from difficulties in the auto industry.
© 2021 Thomson/Reuters. All rights reserved.