Nationwide, office markets improved slightly in the fourth quarter of 2003 as vacancy rates decreased in both the downtown and suburban markets, according to Cushman & Wakefield research. "Leasing is on par," Sicola says, "just not as robust as 2000." In fact, the level of leasing activity has been relatively consistent over the last seven quarters. She notes that the suburban markets were hit hard and face a more difficult recovery. "I expect no change until 2005."
Sublease space continues to decline. On a national basis, sublease space represents approximately 18% of overall available sf and is now at it lowest level since year-end 2001 when it was at 108 million sf. And the national downtown vacancy rate (15.2%) and the national suburban vacancy rate (20.8%) both decreased from the third quarter, from 15.5% and 21.2%, respectively.
Some of the hot markets in 2004 should be Midtown Manhattan, Philadelphia, Portland and Washington, DC, Sicola points out. Washington, DC remains the only downtown market with a single-digit overall vacancy rate (8%), while Midtown Manhattan's overall vacancy rate remained virtually unchanged at 11.9% in the fourth quarter of last year.
In the fourth quarter, demand was strongest in Washington, DC, Southern California and South Florida. Weakest demand was experienced in the San Francisco Bay Area, Denver, Dallas, Seattle and San Jose, as the technology sector continues its slow recovery. New York, Boston and Philadelphia remain resilient and are holding their own, according to the research.
Softer markets include suburban markets of Massachusetts' Silicon Alley, Chicago and Seattle. Also, the overall vacancy rate in San Francisco, hit hard by the tech downturn and the recession, remained flat at 20.1%.
Average-asking rents remained soft with an abundance of available space continuing to hinder landlords. Asking rents are, on average, 15% to 20% below those seen at the peak of the market in the fourth quarter of 2000. Many landlords are remaining aggressive with concession packages, resulting in higher tenant improvement allowances and lower net effective rents, Sicola adds.
Construction starts and completions continue to taper off, which has helped stabilize vacancy rates, especially in downtown markets. Construction completions for 2003 totaled 27.4 million sf, compared to 50.2 million sf in 2002. Nationally, pre-leasing activity ranges from 60% to 75% for new office projects. Projects under construction total 35.1 million sf, almost evenly split between downtown and suburban markets. Slightly more than 23 million sf is slated for delivery in 2004 and 10.5 million sf is expected to come on line in 2005.
And of course, adding more jobs to the mix will be the major factor in the recovery process. "Tenant demand is improving, but employment growth is the key to a sustained recovery," notes Bruce Mosler, president of US Operations, Cushman & Wakefield.
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