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Good Signs for the Office Sector

01/26/2012 | By Carisa Chappell

Good Signs for the Office Sector

The office sector is showing positive signs of recovery as corporations with assets in leading cities enjoyed solid operating gains in 2011, according to industry analysts who participated in a Jan. 25 panel discussion on the sector.

"It was definitely a good year for the 24-hour cities who were taking a disproportionate share of the leasing activity," explained Andrew Florance, president and CEO of commercial real estate information company CoStar Group, which organized the panel for a webcast.

The office sector in larger cities such as Dallas, Seattle, Boston and San Francisco experienced good absorption, according to the participants. "In the top 20 largest office markets, technology and energy are dominating the growth markets in terms of net absorption," Florence said.

However, the disparity between the classes of markets could be seen when contrasting a city such as New York, which had an office vacancy rate of 7.4 percent, versus Phoenix, where the vacancy rate was 20.7 percent.

"It was a softer year in a tertiary city and great year in a leading city," Florance said. "It's the haves versus the have-nots."

Overall net absorption doubled in 2011, according to Walter Page, director of research at Property and Portfolio Research (PPR), who said he expects net absorption to be strong once again in the first half of 2012.

"People are leasing space," he said. "Small tenants are back, and that's the lifeblood of the office sector."

Page noted that the growth of smaller tenants could result in larger office spaces remaining vacant for longer stretches of time. He also suggested landlords might find more success splitting up such spaces to better fit customers' needs.

In terms of new construction, Page said the office market today is highly driven by build-to-suit investments, as opposed to speculative, multi-tenant projects.

"The lack of construction will drive rent growth as you have increased demand," he said. "Rents are going to be a volatile trend. Concession activity will burn off first, and concession activity in terms of free rent seems to be diminishing."

Page said he expects rent growth to ramp up in 2012, but a larger increase will occur at some point between 2013 and 2015.

Jay Spivey, senior director of research and analytics at Costar, said office sales are starting to recover, too.

"It's not record-breaking, but it's good," he said. "The fourth quarter was pretty steady and there were increases throughout the year. We are on par with the fourth quarter of 2010. Only a few markets are seeing a decrease in volume, and that's encouraging."