Research - APRIL 17, 2014

U.S. office market absorption increases significantly in first quarter 2014

by Reg Clodfelter

Year-over-year gains in U.S. market absorption hit 133 percent in first quarter 2014, with no market showing a greater increase than Houston, which recorded nearly 1 million square feet of absorption, compared with just 36,000 square feet during the same period a year ago, according to new research from Cushman & Wakefield.

"The big story for the first quarter is the market's 9.7 million square feet in positive absorption, which compares to 4.2 million square feet of gains last year at this time," Maria Sicola, head of research for the Americas at Cushman & Wakefield, said in a statement. "Many markets with negative absorption at the start of 2013 turned around to positive gains to kick off 2014."

The leading markets in raw occupancy gains were New York City’s Midtown South (1.7 million square feet), Chicago (1.4 million square feet) and San Francisco (1.2 million square feet). Of these top performers, Midtown South and San Francisco also topped lists of the lowest CBD office vacancy rates, while Chicago still sits outside of the top 10, indicating that the MSA has considerable room to continue its momentum. 

Nationwide vacancy rates dropped to 15.6 percent at the end of March, 0.2 percentage points lower than at this time last year. Midtown South and San Francisco were joined by Boston as the only markets with CBD office vacancy under 10 percent (though Boston was essentially at 10 percent), while Midtown South and San Francisco were the only MSAs with marketwide office vacancy below 10 percent, at 7.9 percent and 9.8 percent, respectively.

"The positive momentum in office absorption and vacancies stems from an improving national economy," Sicola continued. "Strong job gains are translating directly into healthy leasing activity as 48.3 million square feet was leased so far this year."

Quarter-over-quarter gains in rent also saw significant movement, with Houston leading the way in this category as well. Its CBD saw class A asking rents increase 9.1 percent quarter over quarter to $41.98 per square foot, significantly outpacing number two in this category San Francisco, which saw quarter-over-quarter gains of 3.8 percent to $60.20 per square foot.

IREN, Institutional Real Estate, Inc.’s premium news service,covered a number of the quarter’s major office deals, including CIM Group’s acquisition of Two California Plaza in Los Angeles for $295.7 million, RXR Realty’s approximately $351 million purchase of 61 Broadway in New York City, the $103 million acquisition of a five-building office complex in Florida by a joint venture between Banyan Street Capital and Oaktree Capital Management, and Heitman’s approximately $250 million purchase of Parkside Towers in Foster City, Calif.

"We like what we are seeing in the office market to date in 2014," Sicola continued. "Looking ahead, barring any unforeseen economic or geopolitical events, we anticipate continued progress as U.S. businesses continue to expand and invest in private-sector jobs."


Lowest CBD office vacancy rates


Vacancy rate, 1Q 2014

Annual change*

1.   New York City – Midtown South



2.   San Francisco



3.   Boston



4.   New York City – Midtown



5.   Denver



6.   Houston



7.   New York City – Downtown



8.   Portland, Ore.



9.   Sacramento, Calif.



10. Philadelphia






* Indicates change in "percentage points" from prior year (not percent).

Source: Cushman & Wakefield Research

All data for this article obtained from Cushman & Wakefield Research for the Americas.

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