US office market 3rd-qtr rent up, vacancy down: What will this cost your company?

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U.S. office vacancy rate falls

* Rents rise for fourth straight quarter

By Ilaina Jonas

Oct 5 (Reuters) - The U.S. office vacancy rate fell in the third quarter and rent increased for the fourth straight quarter, but gridlock in Washington and economic uncertainty slowed tenants' desire for more office space as the quarter progressed, according to an widely followed industry report.

 

US office market 3rd-qtr rent up, vacancy down

"We're in the early innings of a recovery here," Reis economist Ryan Severino said.

 

The average U.S. asking rent grew by 0.4 percent to $27.85, Reis said. Factoring in months of free rent and other perks, effective rent rose 0.5 percent to $22.39, its highest since the fourth quarter 2009, Reis said. Effective rent was up 1.6 percent from a year earlier, Reis said.

 

Behind those figures were tenants' demand for space, as they rented 6.89 million square feet more than they gave up, the highest amount in nearly four years. That came despite the arrival of 3 million square feet of new space, Reis said.

 

That could be a good omen for some large real estate investment trusts such as Boston Properties Inc (BXP.N) and Vornado Realty Trust (VNO.N).

 

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For a related graph see link.reuters.com/kux24s

 

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But the appetite slowed month by month to about 1 million square feet in September from 2.1 million in August and 3 million in July, as the downgrade of U.S. debt and haggling over raising the debt ceiling spooked businesses, Reis said.

 

Although many recent economic indicators, such as an upward revision of second-quarter U.S. gross domestic product, do not point to a recession, optimism faded among fears of another recession spurred on by Europe's debt problems, the stalemate in Washington, stubbornly high U.S. unemployment and weak job growth, Severino said.

 

"I'm cautiously optimistic that negative sentiment and fear is ephemeral," Severino said. "I'm going to cross my fingers."

By area, vacancies in New York, by far the largest U.S. office market, fell 0.1 percentage point to 10.6 percent, while effect rent rose for a fifth consecutive quarter, increasing 1.3 percent to $45.82 per square foot, Reis said.

In another report, Eastern Consolidated said that sales of New York office buildings fell in the third quarter to $6.4 billion from $5.1 billion, with the average price declining to $490 per square foot from $505 per square foot.

Washington, D.C. was still the tightest market with a vacancy rate of 9.3 percent. But its lead over New York narrowed as New York continued to recover while Washington, D.C. is contending with a pullback in government leasing, Reis said.

On the other end of the spectrum, Detroit remained the bleakest market with a vacancy rate that was flat at 26.7 percent, as it still grapples with a weak manufacturing sector.

 

During the quarter, 10 out of 79 markets that Reis covers registered quarterly effective rent declines, down from 22 a year earlier. San Francisco saw the highest year-over-year effective rent increase, at 7.8 percent. (Reporting by Ilaina Jonas in New York; Editing by Steve Orlofsky)

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