April 5, 2012 / 4:02 AM / 5 years ago

Sluggish job growth crimps US office market rebound

* U.S. office Q1 vacancy dips to 17.2 pct from 17.3 pct

* Average U.S. office rent rate inches up 0.6 pct

* Supply lowest since at least 1999

By Ilaina Jonas

NEW YORK, April 5 (Reuters) - The sluggish U.S. labor market translated into a modest dip in the U.S. office market vacancy rate and lackluster rent growth in the first quarter, except in areas where the technology sector was a significant employer, according to a report by real estate research firm Reis Inc.

The national vacancy rate slipped to 17.2 percent in the first quarter, a slight improvement from 17.3 percent in the 2011 fourth quarter, according to preliminary figures from Reis. A year earlier the vacancy rate was 17.6 percent.

The national vacancy rate has risen to levels not seen since 1993 and remains well above the cyclical low of 12.5 percent posted in 2007, before the recession began, according to the report, released on Thursday.

The average U.S. office asking rent rate rose to $28.10 per square foot in the first quarter, up 0.5 percent from the 2011 fourth quarter. Stripping out months of free rent and other perks landlords offer to lure or retain tenants, effective rent rose 0.6 percent to $22.66 per square foot.

The recovery in the New York office market, the nation's largest, slowed in the first quarter, but New York remains stronger than most other markets. At 10.4 percent, New York's vacancy rate is among the lowest in the nation. It was second only to Washington, D.C., which had a first-quarter vacancy rate of 9.4 percent. But Washington's lead is eroding. While New York's financial sector is steadying, Washington remains mired in political gridlock, spending cuts and electoral uncertainty.

During the first quarter, the average New York office rent rose 1.4 percent to $47.22 per square foot. Over the past 12 months the average New York rent is up 4.8 percent, helped by rising demand from the technology sector.

San Francisco, with its tech-heavy economy, posted a 6.8 percent rent increase over the past 12 months to $32.91 per square foot.

Among the 79 markets tracked by Reis, five of the top 10 for rent growth - San Francisco, San Jose, Boston, Austin and Seattle - are technology-oriented markets where job growth has revved up office demand.

The trend could benefit real estate investment trusts such as SL Green Realty Corp, Boston Properties Inc and Vornado Realty Trust, which have significant holdings in those cities.

"What really sets technology apart in a way that some other sectors of the economy can't is the fact that technology is a global industry," Reis Senior Economist Ryan Severino said. "The Facebooks, the Googles and the Apples of the world are not tethered to the U.S economy."

But for landlords outside those cities or with portfolios of suburban office buildings, significant rent growth could be years away.

Markets that had major declines in housing values, such as Las Vegas and Palm Beach, continued to see average rental rates fall over the past 12 months.

Overall, the national office market has posted five quarters of improvement, leading Reis to believe the market is in the midst of a slow recovery. Reis forecast that if the economy continues to improve during 2012 as it is projected to, the office sector should continue along this slow-growth trajectory.

But at this pace of improvement, it will be years before the national office market is able to fill the space that was vacated during the recession and the early stages of the economic recovery, Reis said.

Behind the unimpressive recovery in the office market is the weak labor market. The U.S. economy has struggled to consistently generate more than 200,000 jobs per month, a very weak performance by historical standards for periods of economic recovery, Reis said.

Rents remain at levels last seen in 2007, and five-year leases coming due in 2012 run the risk of being signed at levels equal to or lower than those of 2007, Reis said.

One factor supporting the recovery has been extremely limited new construction. During the first quarter, only 1.917 million square feet of office space was completed, the lowest quarterly level since Reis began tracking quarterly market data in 1999.

"The lack of new supply has been the saving grace for the office sector," Severino said. "The levels of demand that we're seeing right now, while they're positive, they're not really significant. It pales in comparison with cycles past."

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