U.S. Office Market First Look: 2006-Q4

Jan. 26, 2007
Grubb & Ellis offers a fourth-quarter summary and makes predictions for the 2007 office market

According to Bob Bach, senior vice president of research and client services at Chicago-based Grubb & Ellis recently released the following summary of office-market conditions.

  • The economy seemed to dip in the third quarter and bounce back in the fourth quarter of 2006, but none of these gyrations affected demand for office space, as the tightening cycle proceeded on an even keel through the second half of the year.
  • The vacancy rate ended the fourth quarter at 13.6 percent compared with 13.9 percent in the prior quarter and 14.6 percent in the year-ago quarter. During 2006, the two Texas cities of Austin and San Antonio both saw their vacancies decline by more than 4 percentage points, outpacing all other markets at four times the national average. Vacancy rates rose by more than 2 percentage points in Cincinnati, which now has the highest major-market vacancy rate in the United States, as well as San Diego and Las Vegas, where vacancies remain low despite recent construction surges.
  • Fourth-quarter net absorption of 18 million square feet nearly doubled new space completions of 9.3 million square feet, which pushed the vacancy rate lower. Houston and the Washington, D.C., region absorbed the most space in the fourth quarter while, for 2006 overall, Dallas-Ft. Worth was the winner, followed by runner-up Houston.
  • Competitive office space under construction ended 2006 at 72.6 million square feet, an increase of 26 percent from the beginning of the year. This is the highest total in nearly 5 years, but still lags far behind the prior peak of 125 million square feet reached in the third quarter of 2000. Washington, D.C., and its Virginia and Maryland suburbs continue to dominate the construction derby with nearly 11 million square feet underway, more than twice the total in second-place Phoenix.
  • The average asking rental rate for Class-A space, weighted by the size of each market, rose by 10.6 percent in 2006, the first double-digit annual increase since 2000. The sharpest gains were concentrated in a handful of large coastal markets including Boston, New York City, Houston, San Francisco, Los Angeles, and Seattle, though Phoenix and Austin also made the list. Rental rates in a few markets were flat last year, including Atlanta, Detroit, Cleveland, and Pittsburgh.
  • The inventory of available sublease space fell for the 17th consecutive quarter to end the year at 76.2 million square feet, its lowest level since the recession of 2001. The continuing decline in the sublease inventory signifies that the slumping housing market is having little impact on aggregate demand for office space.

GDP and employment growth are expected to recede moderately this year due to the weak housing market. As 2006 wound to a close, however, several economic indicators signaled continued strength, notably the labor market where employers created 167,000 net new payroll jobs in December. Growth has been especially strong in the sectors of professional and business services and educational and health services, both of which generate demand for office space. With slower economic growth on the horizon, we expect absorption to decrease at the same time that the construction pipeline will continue to expand. But, demand still is likely to exceed new supply added to the market in 2007, especially if job growth continues at its recent pace, which will push the vacancy rate lower by year-end. Look for Class-A rental rates to rise by 8 percent in the coming year, with Class-B rates up by 6 percent.

This information was provided by Grubb & Ellis Co., one of the world’s leading full-service commercial real estate organizations. For more information, visit the company's website at

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