The fourth quarter hiccup in the office leasing market proved to be the pause that refreshes. Despite the uneven economy, the market scored a good first quarter.
- Vacancy fell from 17.2 to 16.9 percent, a solid 30 basis-point decline that is consistent with prior recovery cycles.
- Class A asking rental rates rose for a third consecutive quarter to $32.00 per square foot per year, full service. Compared with a year ago, the average Class A rate is up by 3.6 percent.
- The average Class B asking rate increased for a second consecutive quarter to $23.41, a 3.1 percent gain from a year ago.
- Net absorption came in just shy of 10 million square feet, which is, like the vacancy decline, on track with prior recovery cycles.
- Space under construction fell slightly to end the quarter at 23.8 million square feet, meaning that a broad expansion cycle will have to wait for further recovery in rents.
The recovery remains spotty among markets and submarkets with technology and energy-related areas performing the best. Low rental rates encourage tenants whose leases have expired to move up to Class A space – the flight-to-quality stage of the market cycle. As a result, the best properties in the strongest submarkets have led the recovery. However, the modest increase in the average Class B rate suggests that the recovery is spreading deeper into the market, creating some openings for opportunistic and value-add investors. In most areas, landlords remain on the defensive, but tenants should expect their bargaining positions to erode gradually as the year progresses.