It’s slow going in the U.S. office market.
Data released Wednesday shows that vacancy rates in office buildings around the country in the third quarter inched down to an average of 16.9%, from 17%, according to real estate research firm Reis Inc.REIS +0.06%, in a show of how the office sector has proven stubbornly resistant to a quick recovery.
By historic levels, this is still a large amount of vacant space, and shows how employers have been hesitant to expand or plan for future expansion. The rate is close to its post-recession peak of 17.6% reached in 2010, and still well off the boom years-low of 12.5%. The improvements in the office sector have been far slower than in past recoveries of the early 2000s and early 1990s, according to Reis.
The result has been slow rent growth—it’s up 2.3% for the year—something that’s good for tenants but not so great for landlords.
“Unfortunately for the sector, it’s just more of the same,” said Ryan Severino, an economist at Reis.
Of course, there were bright spots in the country, led largely by cities where the tech or energy sectors are strong.
San Francisco saw effective rents—which are rents paid by tenants after incentives and discounts—rise 7.8% over the past 12 months. The city was followed by the San Jose area—which includes Silicon Valley—New York, Houston, and Dallas.
Take Zendesk, the San Francisco-based online support software company that has nearly doubled its San Francisco-based workforce to about 300 over the past year. Cramped in its current space, the company last month signed a lease to roughly triple its office space by leasing an additional 73,000 square feet, all in the San Francisco neighborhood of Mid-Market, which has seen a tech-fueled renaissance lately.
“We’re growing pretty fast,” said John Geschke, Zendesk’s general counsel. “We wanted some space to grow into.”
Such rapid growth by tech firms has caused developers to get building. Kilroy Realty Trust has numerous projects in the city and Silicon Valley under way—including a large new tower for Salesforce.com—and is planning to start on two more later this year.
John Kilroy Jr., the company’s chief executive and chairman, said the developer is bullish given that numerous tenants are already looking at the new projects, which total more than 450,000 square feet.
“We’re in negotiation on all of that square feet multiple times over,” Mr. Kilroy said. “We’re very enthusiastic about what’s going.”
Similar growth—if less pronounced—can be seen in the Dallas area, where Stream Realty Partners is planning to start work later this year or early next year on a 300,000-square-foot project, called Connection Park, without any commitments from tenants.
The Dallas area, said Stream regional managing partner Chris Jackson, is seeing “really, really strong corporate demand right now.”
The mood is less optimistic in Sun Belt cities like Las Vegas—where rents are still falling—as well as Washington, D.C., which has been hard hit by multiple years of fiscal austerity and budget uncertainty.
Rents in Washington ticked down 0.1% for the quarter, although they are up 0.8% over the past year.
Corrections & Amplifications: Zendesk makes online software that companies use to provide customer service. An earlier version of this post incorrectly identified Zendesk as an online tech support company.
Article & Photos Sourced from: Wall Street Journal
http://blogs.wsj.com/developments/2013/10/02/no-shutdown-in-sight-san-francisco-leads-office-leasing-on-tech-strength/
