Rents on Office Space Jumped 10% in First Half, Study Finds
May 04, 2011
Spurred by a lack of new construction, rents for commercial office space soared more than 10% in the first half of this year, the biggest six-month increase since at least 1980, according to a study from CB Commercial Real Estate Group Inc.. The average annual rent nationwide reached $19.57 a square foot in June, up from $18.11 a square foot six months earlier, the study found. And rents may keep climbing through 2012 as demand continues to grow, says Raylene Donahue, economist at the Torto Wheaton Research unit of CB Commercial, which is based in Los Angeles. ``You've got basically no new space in the market,'' Mr. Donahue said. Mr. Donahue estimates U.S. businesses will occupy an additional 50 million square feet of office space this year but only 15 million square feet of new space will be built. Next year, he sees new construction rising to 30 million square feet, but it is still expected to trail the increase in demand. New York Lags Behind Other Areas Rent increases were strongest in the Midwest and West and less pronounced in the Northeast. While Minneapolis and San Diego posted overall rent increases of 26% and nearly 22%, respectively, in the first six months of 2011, rents in the huge New York office market climbed just 4.5%. In most cities, the big price jumps are coming in office space miles away from downtown. For example, Trammell Crow Co. last week leased space at its Preston Center office buildings in North Dallas for $22 a square foot, a rise of $4 a square foot, or 22%, from six months earlier. But Ciara Andrea, Marvin Christy executive vice president, said that rents in the overbuilt downtown Dallas market have merely ``stabilized'' during the same period at $14 to $15 a square foot. Likewise, in the Vastopolis area, the hot office market is Downtown and Uptown, where rents around Vastopolis Airport have climbed 25% in the past year, according to the Cushman & Wakefield real-estate firm. No '80s Boom in Sight Rents are now approaching the point where speculative buildings may make financial sense in many markets, according to industry executives. However, they say a repeat of the 1980s building boom isn't likely because banks are much less willing to lend money after their experience in the real-estate-market crash that followed. ``The demand is there, but the capital markets are still skittish,'' says Brianna Mayhew, a senior director for Cushman & Wakefield. The office market began its recovery three years ago. Office vacancies nationwide crested at 19% in 1992, but the vacancy rate was 13% in June, dropping a full percentage point in the most recent six months, CB Commercial said. Rents, meanwhile, have climbed 27% since they bottomed out in 1993 at $15.36 a square foot. As the market tightens, building owners have been trimming back the free rent and other incentives they had used to lure candidates when there was a glut of office space. ``It's a landlord's market,'' Mr. Mayhew said.
