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Office market: Stuck, treading water, no significant improvement

Limp demand, anemic growth, stalled -- a thousand euphemisms cannot change commercial real estate professionals' assessment of the current condition of the U.S. office market. Research companies released third quarter reports recently, and the numbers show a one-tenth of 1 percent drop in the vacancy rate from second quarter and a three-tenths of 1 percent drop year-over-year.

Annapolis should benefit from the tight market in the city's near neighbor, Washington, D.C. The nation's capital had the lowest vacancy rate -- 9.5 percent -- of all metropolitan areas, though the rate did increase over last quarter. Annapolis hasn't been so lucky, though. According to the MacKenzie Market Report for the third quarter, the office vacancy rate here has crept up over the past 12 months to 15.22 percent -- much lower than the national average of 17.2 percent, but the city's commercial properties are still struggling.

Analysts say that the technology and energy sectors are where the growth is, and cities that boast more tech and energy jobs are seeing improvements in rents. The best performing tech and energy market saw a 5 percent increase since 2011; the four other cities in the top five markets experienced jumps between 2.5 percent and 4.1 percent over last year.

Annapolis rents dropped about 1 percent from the first three months of 2012. The city is outperforming almost every other part of the Baltimore market in terms of dollars-per-square-foot, but the national average actually increased 1.4 percent from 2011.

No one knows better than real estate professionals that stated rent can be very different from what a tenant actually pays. Studies also track "effective rent," or the rate that takes discounts and free months and other perks into account. Landlords are apparently not having to buy as much business, because the effective rent rose during the third quarter -- just 0.3 percent, though, which may qualify as stagnant, treading water or tepid, depending on the analyst.

Office vacancy and rental rates go in cycles, with ups and downs that for a long time were fairly predictable. The cycles have been a little harder to predict since 9/11, but one thing has not changed: The last half of a presidential election year sees very little change. When the election is over, vacancy rates and rents will probably change at a faster pace. Which direction they go will depend on the outcome of the election and what happens with the lame duck Congress.

Sources:

CNBC, "U.S. office market barely gains in third quarter," Ilaina Jonas, Oct. 2, 2012

MacKenzie Commercial Real Estate Services, MacKenzie Market Report - Office, Third Quarter 2012

Our firm works with companies on commercial office space matters, like the lease deals referred to in this post. If you would like to learn more about our Annapolis, Maryland, practice, please visit our commercial real estate page.

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