Despite falling rents and rising vacancy rates, the commercial real estate market could be improving.
According to the New York-based real estate firm REIS, even as the vacancy rate hit a 17-year high of 17.5 percent, the quarterly rate increase was slower compared to last year. And for the first time since 2008, the average rent on 4 billion square feet of office spaces was effectively unchanged from the previous quarter: rents fell one cent to $22.05 per square foot.
In New York rents actually increased 0.2 percent to $43.75 a square foot, the highest in the nation. While it is a small increase, it is an improvement after rents fell nearly 20 percent last year.
“New York is one of the most dynamic office markets,” said Victor Calanog, the research director at REIS. “New York led the way in terms of rent declines in calendar year 2009 and so what’s basically happening is we are seeing a lot of positive churn in leasing because a lot of office tenants, at least those that are still in business, may actually start moving up to the class A space that has now become affordable.”
With a vacancy rate of 11.3 percent, New York has the second lowest vacancy rate in the nation. Washington D.C. has the lowest rate at 9.8 percent.
Vacancy rates for commercial office space in Northern New Jersey was 17.7% in the third quarter of this year, slightly higher than the national average. Rents increased by 0.3 percent to $22.85 a square foot.
As is the case for so many sectors of the economy, any upturn in the commercial real estate market is dependent on unemployment falling.
“As long as job growth is as tepid as it is right now,” said Calanog, “you are not going to see a whole lot of absorption of office space.”
He did say that unlike previous downturns, developers did not build much office space during the recession. As a result, there is less oversupply pulling prices down even further.