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Mini-recovery slows nationwide in first half.

The first six months of 1995 brought a slowdown in leasing activity and the absorption of space throughout the major United States office markets, according to ONCOR International's 1995 Mid-Year Office Market Report. Absorption of space totalled over 13.6 million square feet during the first half of 1995, compared with more than 24 million square feet in absorption charted in two previous six month periods.

"We experienced a mini-boom in office leasing across the United States during the last two years, but the surge in activity we witnessed has slowed dramatically," said Stephen H. Jaggard, ONCOR International's president and CEO. "We expect to see a few more 'false starts' before the true and long-term recovery begins and takes hold."

ONCOR surveys more than 44 U.S. office markets, plus another 25 major commercial real estate markets of the United Kingdom, Europe, Asia, Australia, Canada and South Africa twice a year. ONCOR International is an organization of independent commercial real estate finns around the world providing in-depth knowledge of more than 200 markets in 34 countries.

This slowdown in activity halted - and in some cases reversed - any significant increase in rental rates throughout North America. An average rental rate of $27.50 for the top five cities compares to $27.42 of six months ago. However, most of ONCOR's overseas companies reported increases in rental rates during the last six months. This can mainly be attributed to fluctuations in currency exchange rates.

"Even though the commercial real estate markets appear lethargic, leasing activity, absorption and the stabilization of vacancy rates continues to occur throughout the United States and many overseas markets," Jaggard noted. "New construction, based on need rather than available capital, is creating controlled new inventory within these markets."

According to the ONCOR report, the highest CBD vacancy rate in United States can be found in downtown Dallas, where vacancies have reached 36.6 percent. In the United States CBD vacancies, Dallas is followed by White Plains (30 percent), Tampa/St. Petersburg (27 percent), and Hartford, CT (26 percent). Just six months ago, Downtown Dallas charted the country's highest vacancy rate (35 percent), followed by White Plains (30 percent).

Charlotte, NC has the lowest U.S. CBD vacancy rate (5 percent), followed by Raleigh-Durham, NC (5.8 percent), Winston-Salem, NC (9.2 percent), Portland, OR and Washington, DC (9.4 percent each), and finally, San Francisco, CA (10.1 percent). More than 10 major U.S. markets boast vacancy rates below 13 percent - indicating that these markets have all achieved near market equilibrium (stability in the supply-demand ratio).

"Decline in vacancy rates is ideal, but stability is certainly welcome," Jaggard said. "The true indicator of a healthy market is its ability to digest available space. While absorption has certainly slowed during the first half of 1995, we are comforted by the knowledge that space continues to be absorbed rather than returned to the market."

According to the ONCOR report, Chicago experienced a whopping 4.9 million square feet in net absorption since July of 1994. Washington, DC (4.1 million square feet), Boston (3.7 million), Detroit (2.7 million), Atlanta (2.4 million) and Dallas (2.1 million) also charted high positive net absorption and market activity in the United States.

Overseas, Bangkok charted 3.6 million square feet in absorption since July of 1994. Other cities which experienced positive net absorption include: Toronto (3.3 million square feet), Hong Kong (3.2 million), Kuala Lumpur (2.3 million), Hamburg (1.9 million), and Berlin (1.7 million). Johannesburg, South Africa, and Ottawa, Canada were the only international markets surveyed by ONCOR that posted negative net absorption: negative 185,000 and 90,000 square feet, respectively, and Johannesburg's improving economic situation has slowed returning space considerably, (last year's negative absorption exceeded 800,000 square feet).

"As we've noted for the last few years, absorption of space has been centered in the newest Class A properties," Jaggard said. "This activity creates demand for such space and might cause an increase in rental rates. To date, however, rental rates remain fiat throughout the U.S., and have declined to just about their lowest point in Class B and C properties."

in the United States CBDs, New York City boasts the highest total average rental rate (including operating costs) at $34.00 per square foot. The other most expensive U.S. office markets are: West Palm Beach, FL ($31.36 psf), Washington, DC ($30 psf), and Boston ($28 psf).

According to the ONCOR report, the best bargains for CBD office space in the United States can be found in Phoenix and Houston ($14 psf), Denver ($14.50 psf), Winston-Salem ($15 psf), and Tampa/St. Petersburg and Raleigh-Durham ($16 psf).

"Given the international nature of so many corporate users, ONCOR keeps a keen eye on rental rates and opportunities around the world," Jaggard said. "We've certainly been busy monitoring our overseas markets and have watched major new construction drive up rates, along with shifts in currency exchange rates."

On an international scale, rental rates have begun to increase in many markets. Hong Kong boasts a significant rental rate of $146.80 per square foot. Other top rents can be found in the international magnet cities of Beijing ($89.20), Shanghai ($78), London ($61), Ho Chi Minh City ($48.40) and Luxembourg ($43). In Canada, rents average $25.34 in the CBD for Toronto, and $24.81 for Montreal.

"We are witnessing significant new construction projects in top cities around the United States, from major cities such as Washington D. C. and Atlanta to the rapidly growing Raleigh-Durham area," Jaggard explained. "While we have a ways to go, we are clearly on the path to recovery and making good progress."

In terms of new construction, 8.1 million square feet of commercial real estate development is currently underway in the United States. In Europe, however, where vacancy rates are low, over 30 million square feet of new construction is underway - Berlin alone accounting for almost 18 million square feet of new construction. Additionally, Hamburg (3.2 million), Madrid (1.3 million), Cologne (1.3 million) and Brussels (1 million) are building more than 70 new projects. In South Africa, more than 4.2 million square feet of office construction is underway in Johannesburg, while in the United Kingdom, 1.3 million square feet is being built in London.
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Article Details
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Title Annotation:office market; 1995
Publication:Real Estate Weekly
Article Type:Industry Overview
Date:Jul 19, 1995
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