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U.S. Office and Industrial Vacancy Rates Decline for First Time in Three Years

Retail Availability Stabilizes After 17 Quarters of Increases. Multi-Housing Demand Continues to Strengthen

Boston – October 11, 2010 For the first time in three years, the national vacancy and availability rates in the U.S. office and industrial markets have declined, according to the latest analysis from CBRE Econometric Advisors (CBRE-EA). In the third quarter (3Q) of 2010 the national office vacancy rate fell by 10 basis points (bps) to16.6%, the first drop since the office market correction began in the second half of 2007. The national industrial availability1 rate also recorded its first decline in three years, decreasing 10bps to 14.0% in 3Q 2010.  

Additional signs of stability were also evident in the retail market, where the overall availability rate held steady at 13.2% compared with the previous quarter.  This stabilization ends a run of 17 consecutive quarterly increases.  At the same time, multi-housing demand continued to strengthen, with that market’s national vacancy rate in 3Q 2010 dropping to 5.7%, a 30bps drop from the previous quarter. 

"With new construction extremely low across all property types, even small amounts of demand translate into decreasing vacancy rates," said Jon Southard, Director of Forecasting, CBRE-EA. "We are starting to see the first signs of demand as tenants see more stability in their businesses and are now looking to take advantage of low rents and a wide array of occupancy choices." 

CBRE-EA’s 3Q 2010 analysis found that office markets extended a better-than-anticipated performance this year, thanks to slower fundamental deterioration in downtown areas and improvements in suburban areas. The suburban submarkets continued to outperform central business districts, declining by 20 bps, compared to an increase of 10 bps for Downtown areas. 

 Among best performers in 3Q 2010 were the markets most affected by the housing and financial crisis. Though this is a sign that some local economies are turning the corner, it will prove to be a lengthy recovery as many of these markets achieved record-high vacancy rates during the correction. Florida markets, including Tampa, West Palm Beach and Miami, were among the top quarterly performers, as tenants with strong balance sheets took advantage of rent concessions and heavy discounts to increase their occupancy. Vacancies declined in 32 of the 57 markets this quarter, with six remaining unchanged, while 19 saw vacancy increases.  

The 10bps decline in industrial availability brought the national rate to 14.0%. Though modest, this is the first drop in three years. However, the industrial availability rate remains near a record high, indicating significant excess supply across most markets. Industrial availability increased in 24 markets, declined in 30, and remained unchanged in six. The three markets exhibiting the largest availability increases during 3Q were Dayton (490 bps), Nashville (220 bps), and Allentown (150 bps). The markets that exhibited the steepest industrial availability rate decreases were Salt Lake City and St. Louis (-160 bps each). 

At 13.2% the overall retail availability rate held steady from the previous quarter for the first time since 2006, but increased by 60 bps compared to a year earlier. The positive year-over-year retail sales trend that began during the holiday shopping season of 2009 has slowed a bit in recent months, but growth remains above 4%, which in the third quarter translated into stabilizing availability rates. Continuing positive core retail sales growth proves that the consumer recovery has not been derailed. 

Preliminary data indicates that apartment demand continued to strengthen in 3Q 2010, as the national vacancy rate came in at 5.7%, a 30bps decrease from the prior quarter. This was a 160bp drop from a year ago, and the strongest improvement on record. The year-to-date decline in the national apartment vacancy rate implies that demand in this segment is now expanding at a rate of about 300,000 units annually. Vacancy rates are quickly approaching their historical norms across markets. 

1 Availability is space that is actively being marketed and available for tenant build-out within 12 months.

About CB Richard Ellis
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