Office Leasing Vacancy is on the Rise Across the Nation

August 4, 2017  /  commercial office leasing

2017 is shaping up to be a big year for office building deliveries. Indeed, this year deliveries are expected to peak thanks to 65.6 million SF of new office space coming online. Yet this increase in deliveries is also driving up office vacancy rates. Commercial office leasing hasn’t been able to keep up with the rate of new buildings.

Andrea Cross, head of office research for CBRE Americas says that this rise in office lease vacancies is mainly due to the delivery of the aforementioned new office space. Almost 12 million SF of space was delivered in Q1 2017 making it, “the second-highest quarter of deliveries since the Great Recession.”

In addition to new office space coming online, Cross also points says that some of the vacancies are occurring in suburban markets. She says that aging complexes with few amenities are now driving suburban tenants away from outdated office parks and into urban areas. Cross also predicts that vacancies will continue to increase over the next few years.

A Volatile Decade for Office Occupancy

The past decade has been a roller coaster ride for commercial real estate. In Q3 2007, just before the Great Recession, the office vacancy rate in the US reached a cyclical low of 12.5 percent. However the recession changed everything completely, bringing a steep increase in vacancies over the next two years.

An 11.6 million SF loss in occupancy in Q1 2010 created a 16-year high of 17.2 percent, the highest office vacancy rate since 1994. Q2 of that same year the rate rose even more to 17.4 percent. During that time period, rents steadily decreased and the commercial real estate market effectively bottomed out.

After seven years of shrinkage in vacancy rates, the market has been mostly static over the past year with only a slight increase in overall vacancy. In Q1 of 2016, the vacancy rate was 13.2 percent. Across the nation, office occupancy was relatively stable – rates fell in many markets, rose slightly in others and held steady in a few. The rate dipped slightly throughout last year before rising 10 basis points in Q1 2017 for vacancy rates of 13 percent. In the same quarter,  the average asking rates for office space grew, but only by less than 1 percent.

Trending Up or Down?

CBRE predicts the nationwide vacancy rate will increase to 13.1 percent by the end of this year and will continue to rise to 13.3 percent by the end of next year. Alternatively, other sources predict that the office vacancy rate will decrease over the next year and a half, dipping as far as 12.4 percent by the end of 2018 and coinciding with decreased vacancy in other real estate sectors as well.

Recession, Cutbacks and Recovery

The Great Recession impacted office vacancy in huge ways. Employers scaled back and let people go, lessening the demand for office space. In the years following the recession, tight credit markets prevented developers from adding new commercial properties. This cut down on new office space and produced the lowest level of completion since real estate research firm Reis Inc. began publishing this data in 1999.

Taking all factors into account, the current office vacancy rate is not all bad news. The ever-improving job market, the willingness of banks and investors to lend money for new projects and the office space that is expected to come online by the end of 2018 point to positive growth across the board.

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