Leasing activity is on the rise. Companies are modestly hiring, driving up transaction activity as tenants slowly start the process of renewing leases, searching for good deals and making other occupancy decisions postponed during the last 2+ years. This isn’t to say we are through all the pain (debt is looming), but certainly businesses are at least coming out from under the bed and facing a new day.
It is likely office vacancy rates have peaked nationally, meaning Portland probably has six more months of climbing vacancy in most submarkets. The downtown (Central Business District or CBD) submarket would be the exception. Thanks to some big moves by the GSA and other companies moving in downtown as emerging industries like green tech gain momentum, the CBD is starting to tighten on office space, particularly for larger tenants.
Office rents are expected to begin rising in most U.S. markets by the middle of next year. But again, the Portland CBD may hit that pace sooner. The suburban markets will lag. Across the country, Landlords are not likely to see significant growth in net operating income for years to come, think 2015. Nominal rents adjusted for inflation have decreased every quarter since early 2008. They are now down 20% from a decade ago, from over $24/SF to $19/SF nationwide. On a 5,000 SF lease that’s a difference of almost $2,100/month.
First quarter 2009 was the worst three-month period for leasing in a decade. Many tenants delayed decisions to sign a new lease or renew as the market continued to add vacancy and drop rates. However, first quarter 2010 is shaping up to be one of the strongest leasing quarters in five years. All of this good news doesn’t necessarily translate into positive absorption just yet, as 50% of the top 20 markets showed negative absorption.
All of this is good news considering the dismal performance of 2008 and 2009. But there are still big challenges ahead that will likely cause a recovery stall or value drop in the commercial real estate market.