RPT-U.S. office market recovery slows to a crawl

Tue Jul 3, 2012 4:29pm IST

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* U.S. office vacancy rate stays at 17.2 pct in Q2

* Pace of rent increase slows by half to 0.3 percent

* Space added to U.S. wouldn't fill Empire State Building

By David Henry

NEW YORK, July 3 (Reuters) - The U.S. office market's recovery, which began a year and a half ago, s lowed in the past three months as weak employment and worries about the economy discouraged renters, according to a report by real estate research firm Reis Inc.

The vacancy rate did not budge.

Prices barely increased.

The vacancy rate - at 17.2 percent in the first and second quarters of this y ear - is o nly slightly below the 17.6 percent at the end of 2010 when the recovery began.

Effective rents, which factor in discounts on listed asking prices, were $22.72 per square f oot - up 0 .3 percent in the second quarter and ha lf the size of increases in the first quarter of this year and a year ago.

The research firm's report blamed the slack readings on weak job growth and doubts among tenants about the economy because of th e euro zone's debt and ba nking crisis, the close presidential race and the potential contraction in federal spending.

"It seems like organizations have really become a lot more skeptical of the future," said Ryan Severino, senior economist at Reis.

Tenants took 4.1 million more square feet of space in the quarter than they vacated, down from the 6 million square feet absorbed in th e fi rst quarter.

"There should be more robust recovery at this point," S everino said. " This wasn't a breakneck pace of recovery to begin with."

The report would have shown a weaker U.S. office market recovery but f or the fact that new space completed across the United States added only 1.6 million square fe et - not ev en two-thirds as much as is in the Empire State Building.

The amount of space added was the least in any quarter, according to records going back to 1999.

BIGGEST RENT HIKES IN TECH CITIES

In New York City, the vacancy rate improved by 0.2 percentage point from the previous three months to 10.2 percent, the second-tightest reading of 79 metropolitan markets.

Washington, D.C., had the lowest vacancy rate at 9.4 percent, down 0.1 percentage p oint.

Six of the top 10 markets for rent growth have economies with large technology sectors: San Francisco, San Jose, Boston, Austin, Seattle and Denver, according to Reis. That should be an advantage for real estate investment trusts, such as SL Green Realty Corp,, Boston Properties Inc and Vornado Realty Trust, which have holdings in cities with strength in technology.

Effective rents increased the most in San Francisco, rising 1.1 percent to $33.27 per square foot. N ew York City ranked second, with a 0.7 percent increase in effective rents to $47.57 per square foot. Rents in Houston, which ranked third, rose 0.5 percent to $20.65 per square foot with help from the energy sector.

Markets with significant drops in home prices experienced a continued decline in office rents, according to the report. For ex ample, in Las Ve gas, rents fe ll 0.3 percent to $18.09 per square foot.

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