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NEW YORK: Demand for office space in markets where technology and energy drive employment has helped steer the overall US office vacancy rate down to its lowest level since early 2009, a report by Jones Lang LaSalle Inc released on Friday showed.
In the early days of the recovery from the recession, the East Coast markets such as Washington D.C. were the strongest, while the rest of the country lagged. But governmental cutbacks and ongoing problems and uncertainty in the financial markets have put pressure on those office markets. Meanwhile, the high growth private sector industries of energy and technology have increased the demand for space where those companies are located.
“In the first quarter 2011 we really saw a fundamental shift that has carried through over the past six quarters, where the East Coast is largely absent from the recovery,” said John Sikaitis, Jones Lang LaSalle senior vice present of research.
"Whereas as the West Coast, which is a smaller market segment from an inventory standpoint, has seen a lot of the expansion gains.” Leasing in the second quarter was strong in markets on the West Coast or South where technology or energy were the main job drivers. In those areas, tenants rented more space than they gave up. That figure, known as “net absorption” was 1.2 per cent in San Francisco in the second quarter, the report said. It was 3.1 per cent in Silicon Valley, the US top technology center.
Houston, where the energy sector fuels employment, absorption was a positive 1.2 per cent.
Those markets also saw vacancies fall significantly. For example, Silicon Valley’s vacancy rate fell to 18.5 per cent from 23.2 per cent a year earlier, according to Jones Lang LaSalle.
On the flip side, markets where employment rests on the public or financial sectors foundered. In New York, net absorption was flat and in Washington D.C. it was negative 0.4 per cent. Washington’s vacancy rate rose and rent fell from a year ago.
The shift has made things more challenging for some publicly traded landlords, such as Vornado Realty Trust, which has office buildings in New York and Washington.
Overall, leasing activity across the country remained depressed as many companies extended leases in 2009 and 2010 to lock in bottom-level rents.
Uncertainty about Europe’s future and U.S. economic and tax policies have also prompted many companies to delay leasing new space until they have a clearer view of their future needs.
The imbalance has translated into a plodding recovery in the US office market. The national office vacancy rate at the end of the second quarter stood at 17.3 per cent, down from 17.4 in the first quarter and 18.1 per cent a year earlier, according to the report.
The average US office rent was US$28.19 per square foot annually, inching up from US$28.09 per square foot in the first quarter and US$27.42 per square foot a year earlier.
Although the average asking rent has improved, it is still about two thirds below the peak level in 2008. However, factoring out months of free rent and other concessions that landlords offer to lure or keep tenants, the average net effective rent has regained nearly 45 per cent of its peak rate. -- Reuters