Overall vacancy is expected to reach 17.8% by the end of the year, up more than a full percentage point from the end of 2002. By the end of 2004, it is expected to be back at 17%. As in most major markets, the lowest vacancy is in the CBD, which is currently 12.5% vacant, according to the report.
The drop in vacancy will be fueled by gains in employment and a further decline in construction completions, which will result in a net absorption of office space. Local employment is forecast to rise by 1.8% in 2004, compared to an expected loss of 0.9% this year. Moreover, the gains will come largely in the professional and business services categories, which produce office jobs.
Construction completions in 2003 are expected to end the year at 710,000 sf, off more than 45% from 2002. In 2004, completions are forecast to fall another 40% or so to 410,000 sf.
The situation should help bolster rents. Having fallen by 5.6% during 2003 to an average of $15.71 per sf per year, they are expected to rise by 1.3% in 2004 to $15.91, with most of that captured in the form of shrinking concessions.
On the investment side, class A activity will remain sparse, particularly in the suburbs, according to the report. The good news is that values remain sturdy despite a 30% drop in investment activity. The median price was and will remain at around $118 per sf, according to the report. The drop in investment activity is in part due to a drop in properties being brought to market, as major developers and institutional investors are holding properties until the recovery is in full force.
In Marcus & Milichap's recent ranking of the top 38 office markets, the city ranked No. 28, up two spots from last year. The ranking is based on a series of 12-month forward-looking supply and demand indicators. Washington, DC, topped the 2004 ranking. Four markets in California rounded out the top five: San Diego (No. 2), Riverside-San Bernardino (No. 3), Orange County (No. 4) and Los Angeles (No. 5). The markets that make up the bottom of the index--Seattle, San Francisco and San Jose--have economies with above-average exposure to manufacturing, technology or telecommunications, according to the report.
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