Office Vacancies Decline As Employment Gains Drive Demand

Macroeconomic conditions continued improving at a moderate pace in the second quarter of this year. Real gross domestic product (GDP) advanced at an annual rate of 2.3 percent, to $16.3 trillion, according to the Bureau of Economic Analysis. The gain remained below the long-run historical average of 3.0 percent. The increase in GDP was driven by higher consumer spending, exports, residential fixed investment, and government spending.

The improved economic environment proved favorable for commercial fundamentals, as demand for commercial lease space continued advancing in the second quarter of 2015, rebounding from the soft performance of the wintry first quarter. While construction has been ramping up across all property types, the gap between demand and supply continued to add downward pressure on availability.

Office net absorption totaled 14.4 million square feet in the second quarter of 2015, up from the weaker first quarter’s 6.3 million square feet, based on data from JLL. Compared with 20.7 million square feet absorbed in the first half of the year, new completions totaled 15.5 million square feet over the period. Overall office vacancies declined from 15.6 percent in the first quarter to 15.3 percent in the second quarter. Based on JLL’s research, office vacancies are expected to drop below 15.0 percent by the end of this year. Rents for office properties rose 2.5 percent over the first six months of 2015, leading to projections that—at the current demand pace—they will close the year higher by 5.0 – 6.0 percent from 2014.

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Fundamentals in REALTORS® CRE markets moved in tandem with the broad markets during the second quarter 2015. Leasing volume during the second quarter rose 5.0 percent compared with the first quarter 2015. Leasing rate growth remained steady, rising 3.0 percent in the second quarter, compared with the 3.0 percent advance in the previous quarter. Office vacancies declined 65 basis points to 15.9 percent compared with a year ago.

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Lease concessions in REALTORS® CRE markets declined 8.0 percent. Tenant improvement (TI) allowances averaged $10 per square foot per year nationally. In keeping with higher vacancies, office properties recorded the highest TI rates at $17 per square foot per year.

To access the Commercial Real Estate Outlook: 2015.Q3 report visit http://www.realtor.org/reports/commercial-real-estate-outlook.

George Ratiu, Director, Quantitative and Commercial Research

George Ratiu, Research Economist, writes regular economic columns and conducts research in the areas of commercial real estate, international investments, mortgage performance and foreclosures. He produces NAR’s Commercial Real Estate Outlook and manages quantitative surveys, including the Commercial Real Estate Quarterly Market Survey.

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