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US office market on the rebound

Tech companies fueling growth

By Hui-yong Yu
Bloomberg News / July 12, 2011

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Amazon.com drew attention from landlords in March when it leased most of a 36-story downtown Seattle tower built during the recession, a sign that technology job growth would help lift US office rents and occupancies.

“The reduction of big blocks of space is always the first indicator of recovery,’’ said Patrick Callahan, chief executive officer of Urban Renaissance Group, a Seattle-based commercial real estate developer and investor that manages about 2 million square feet of properties.

The US office market gained 3.7 million square feet of net occupied space in the three months through June, the third straight quarterly increase, Reis Inc. said last week. Vacancies fell or were unchanged in nine of the 10 largest office markets, and declined in more than half of the 79 metropolitan areas surveyed, the New York-based property-research firm said.

Demand for space from technology companies is leading a rebound in US office rents. Groupon, the Chicago-based coupon-website operator, in June signed a lease for a 40,000-square-foot building in Palo Alto, Calif., to house its growing Silicon Valley product and engineering staff. The building is more than triple the size of Groupon’s current space in the city, said Julie Mossler, a spokeswoman for the company.

Rising demand in large cities is helping to increase effective rents, or what tenants pay after such landlord concessions as rent-free months.

Effective rents rose in six of the top 10 markets last quarter, Reis said. San Francisco climbed the most, gaining 6 percent from a year earlier, according to the firm.

“Northern California in the last six months has shown tremendous strength,’’ said Frank Cohen, a senior managing director in real estate for Blackstone Group, whose Equity Office unit has stakes in 19 million square feet of office space in the San Francisco Bay area and Silicon Valley.

Demand from technology companies helped drive asking rents in San Francisco up to $40.06 a square foot in the second quarter, a 19 percent increase from a year earlier and the biggest advance in four years, according to Jones Lang LaSalle Inc. Net absorption totaled almost 1.3 million square feet in the 12 months ended June 30, making San Francisco the nation’s top-performing office market, the Chicago-based broker said.

New York, Boston, and San Jose, Calif., also were among the top 10 markets in effective rent growth in the second quarter, Reis said. Demand from financial services and media companies drove the gains in New York, while technology and life-sciences tenants buoyed the Boston area, Cohen said. Technology demand also is strong in Austin, Texas, he said.

“In markets that have had the most growth, we’ve seen blocks of space dwindle, and we are seeing strong increases in rent,’’ Cohen said in a telephone interview from New York. In Midtown Manhattan, Equity Office has boosted gross rents by as much as 30 percent since the beginning of last year, he said.

New space coming onto the market prevented a decline in the national office vacancy rate, which was unchanged from the first quarter at 17.5 percent, Reis said. A year ago, the rate was 17.4 percent.

A total of 1.8 million square feet of new space became available, the lowest since Reis began publishing quarterly data in 1999.

Financial services, insurance, and real estate companies are the largest users of office space, accounting for almost 22 percent of the US total, according to CoStar Group. Services companies, including technology, are second, at 14 percent, according to the Washington-based research company.