Office demand slackens with slow job growth


New demand for U.S. office space slipped in the fourth quarter from three months ago and a year earlier as job growth remained sluggish, according to a report.

Tenants took on 3.7 million square feet of additional office space in the fourth quarter, down from 4.8 million in both the third quarter and the year-earlier period, according to the report released on Monday by real estate research firm Reis Inc.

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"Without a robust labor market recovery there will be no robust office market recovery," said Ryan Severino, senior economist for Reis.

Employers added a lackluster 155,000 jobs in December and the unemployment rate held steady at 7.8 percent, the government said on Friday.

The office vacancy rate in the quarter was 17.1 percent, far higher than the 12.6 percent recorded at the end of 2007 right before tenants gave up space in the financial crisis.

The vacancy rate, however, edged lower by one-tenth of one percentage point in the quarter as developers added only 3.2 million square feet of space, less than renters took on. U.S. office inventory amounts to 4.09 billion square feet, according to Reis.

Weak demand for space gives developers little reason to build, Severino said. Lenders continue to impose more stringent requirements on developers before they will provide construction financing, he said.

The vacancy rate peaked at 17.6 percent in the financial crisis.

Average rental rates, adjusted for discounts and incentives offered by landlords, grew by a weak 0.8 percent in the quarter to $22.96 per square foot per year, Severino said.

The cities with the tightest markets continue to be those with stronger technology or energy sectors in their economies. Rents in San Francisco, for example, rose 3.6 percent, the most of any of 79 markets, to $34.69 per square foot. The vacancy rate in San Francisco was 13.8 percent.

Washington, D.C. has the tightest market of all at the moment, with a vacancy rate of 9.3 percent. But Severino expects New York to take that title soon as its increasingly important technology sector takes more space and as the government in Washington cuts employment.

The vacancy rate in New York was 9.9 percent in the quarter, two-tenths of a percentage point better than three months earlier. The average rental rate in New York was $48.55 per square foot, up 1.4 percent in the quarter.

(Reporting by David Henry in New York; Editing by Kenneth Barry)