Wary About Office--Tenants Edge

We are six years into recovery and the national office vacancy rate is hovering somewhere around 15%. Is this the new equilibrium? Ten percent or under vacancy used to be the rationalized comfortable zone for relative supply-demand balance, but not many office markets can boast those numbers in the Era of Less, especially out in the suburbs where much of the vacancy concentrates. Now, spec projects ramp up in many downtown markets beyond the relatively safe 24-hour cores. Denvew is an example.   Developers see opportunities to leach tenants from old, dated buildings into new generation, energy efficient towers.

As we have pointed out before, developers are primed to take advantage with new office product in markets starved for new buildings. They can attract a high-end market sliver of tenants willing to pay up for modern construction. But that market has limited depth and can sustain so much new product with a ceiling on how high rents can jump. Meanwhile, tenants continue to shrink space needs. A  Washington Post article this week headlined the demise of the corner office, even in law firms—glad they finally noticed.