According to the first quarter report by property research firm Reis Inc., the U.S. office market is poised for a likely recovery in 2011, after a slump in market fundamentals for three and a half years due to the economic downturn that had plagued the industry.
The report revealed that the office vacancy rate declined for the first time since before the recession during first quarter 2011, spurred by a stronger labor market that had led companies to sign more leases to accommodate a larger workforce.
Earlier, the recession had resulted in fewer construction activities due to the liquidity crisis, which led to a supply-demand imbalance triggering a spike in rents. This further contributed to an increase in vacancy rates as companies retrenched their workforce and curtailed leased space to improve the cash position.
However, with the gradual revival of the economy, office markets are slowly on their way up. Total occupied space increased by 4.7 million square feet during the first quarter, due to which the overall national vacancy rate dipped by 0.1% compared to the prior quarter to 17.5%. Washington DC recorded the lowest vacancy rate among all the 85 markets tracked by Reis at 9.2%, followed by New York City at 10.7%.
On the other hand, Detroit and Phoenix each had the highest vacancy rate at 26.6%, with the former suffering from high rates of joblessness and population declines and the latter languishing from the housing crisis.
Asking rents (the amount of rents demanded by the owners) and effective rents (the amount of rents actually received by the owners after taking into account such benefits as free rent and interior work) both improved 0.5% during the reported quarter to $27.66 and $22.20 per square foot, respectively. San Francisco saw the biggest escalation in rents – up 3.6% to $30.83 per square foot.
Despite a marked improvement, overall rents are still well below the pre-recession peak values of 2008, when effective rents reached as high as $25.00.
The recent research report comes as an encouragement for office REITs (real estate investment trusts) like Vornado Realty Trust (VNO) and Boston Properties Inc. (BXP).
New York-based Vornado Realty has a strong asset portfolio in two of the best long-term office markets in the U.S. – New York City and Washington DC. These high-barrier markets have held up comparatively well and have enabled the company to continue increasing rents.
The company also has a strong balance sheet with manageable near-term debt maturities and adequate liquidity to take advantage of distressed selling as asset values of office and retail properties continue to drop.
Boston Properties owns and develops one of the largest Class – A office, industrial, and hotel properties in the U.S. The company concentrates on a few select high-rent, high barrier-to-entry geographic markets, such as New York and Washington DC. With improving market fundamentals, Boston Properties is likely to restart construction this year on a $1 billion 40-floor Manhattan skyscraper, suspended since 2009.
We maintain our ‘Neutral’ rating on Vornado Realty, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold’ rating. We also have a ‘Neutral’ recommendation and a Zacks #2 Rank (short-term ‘Buy’) for Boston Properties.
BOSTON PPTYS (BXP): Free Stock Analysis Report
VORNADO RLTY TR (VNO): Free Stock Analysis Report
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