Tech Leads Office Rebound

Market for office space posts gain for third consecutive quarter.

Amazon.com Inc. drew attention from landlords in March when it leased most of a 36-story downtown Seattle tower built during the recession, a sign that technology job growth would help lift U.S. office rents and occupancies.

“The reduction of big blocks of space is always the first indicator of recovery,” said Patrick Callahan, chief executive officer of Urban Renaissance Group, a Seattle-based commercial real estate developer and investor that manages about 2 million square feet (186,000 square meters) of properties.

The U.S. office market gained 3.7 million square feet of net occupied space in the three months through June, the third straight quarterly increase, Reis Inc. said today. Vacancies fell or were unchanged in nine of the 10 largest office markets, and declined in more than half of the 79 metropolitan areas surveyed, the New York-based property-research firm said.

Demand for space from technology companies is leading a rebound in U.S. office rents. Groupon Inc., the Chicago-based coupon-website operator, in June signed a lease for a 40,000- square-foot building in Palo Alto, California, to house its growing Silicon Valley product and engineering staff. The building, at 3101 Park Blvd., is more than triple the size of Groupon’s current space in the city, said Julie Mossler, a spokeswoman for the company.

 

Climbing Rents
Rising demand in large U.S. cities is helping increase effective rents, or what tenants pay after such landlord concessions as rent-free months. Effective rents rose in six of the top 10 markets last quarter, Reis said. San Francisco climbed the most, gaining 6 percent from a year earlier, according to the firm.

“Northern California in the last six months has shown tremendous strength,” said Frank Cohen, a senior managing director in real estate for Blackstone Group LP, whose Equity Office unit has stakes in 19 million square feet of office space in the San Francisco Bay area and Silicon Valley.

Demand from technology companies helped drive asking rents in San Francisco up to $40.06 a square foot in the second quarter, a 19 percent increase from a year earlier and the biggest advance in four years, according to Jones Lang LaSalle Inc. Net absorption totaled almost 1.3 million square feet in the 12 months ended June 30, making San Francisco the nation’s top-performing office market, the Chicago-based broker said.

 

New York
New York, Boston and San Jose, California, also were among the top 10 markets in effective rent growth in the second quarter, Reis said. Demand from financial services and media companies drove the gains in New York, while technology and life-sciences tenants buoyed the Boston area, Cohen said. Technology demand also is strong in Austin, Texas, he said.

“In markets that have had the most growth, we’ve seen blocks of space dwindle and we are seeing strong increases in rent,” Cohen said in a telephone interview from New York. In midtown Manhattan, Equity Office has boosted gross rents by as much as 30 percent since the beginning of last year, he said.

New space coming onto the market prevented a decline in the national office vacancy rate, which was unchanged from the first quarter at 17.5 percent, Reis said. A year ago, the rate was 17.4 percent. A total of 1.8 million square feet of new space became available, the lowest since Reis began publishing quarterly data in 1999.

Financial services, insurance and real estate companies are the largest users of office space, accounting for almost 22 percent of the U.S. total, according to CoStar Group Inc. Services companies, including technology, are second, at 14 percent, according to the Washington-based research company.

 

‘Turning Point’
“Concessions are down and rents are up,” said Ada Healey, vice president of real estate at Seattle-based Vulcan Inc., billionaire Paul Allen’s investment and development company. Amazon.com’s lease at Schnitzer West LLC’s 1918 Eighth Ave., in Seattle’s Denny Triangle neighborhood, “was clearly a turning point” in the city’s office market, Healey said.

Employers in the U.S. probably expanded payrolls by 100,000 workers last month after a 54,000 increase in May that was the smallest in eight months, according to the median forecast of economists surveyed by Bloomberg News ahead of Labor Department data due July 8. The jobless rate held at 9.1 percent.

“The jobs we’re getting are in office-using industries,” said Asieh Mansour, head of Americas research for Los Angeles- based CB Richard Ellis Group Inc., the largest commercial property services company. “The trend in leasing is up.”

 

Office REITs Climb
The Bloomberg Office Real Estate Investment Trust Index has climbed 45 percent after dividends during the past year, more than the 33 percent gain for the Standard & Poor’s 500 Index.

Office buildings in central business districts are seeing the biggest increases in demand, as corporate tenants flock to urban areas with such amenities as restaurants and public transit, Mansour said. In past recoveries, suburban office markets typically improved first as small businesses leased space in those areas, she said.

“This is the first time I’ve seen this,” Mansour said. “In this cycle, small businesses sat on the sidelines. They don’t have access to credit, to bank loans. What’s driving the recovery is the big companies.”

The technology industry accounted for about a third of net new leases in the San Francisco Bay area so far this year, followed by financial services at 20 percent, Mansour said. Five years ago, the predominant office users in the area were financial services and law firms, she said.

Reis expects rents and occupancies to continue to improve in the second half of the year, said Ryan Severino, an economist at the firm. Increases may be hurt by the addition of fewer jobs than economists expect and the continued impact of such global disruptions as the earthquake and tsunami in Japan, he said in today’s report.

“Recent developments in the economy serve as a stark reminder that this will be a protracted and inconsistent recovery in the office market,” Severino wrote.

 

Bloomberg News

 

 

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