The saying is that no news is good news, but in a recovering office real estate market, we would much prefer to see some numbers moving in the right direction. Unfortunately this is not the case for second quarter 2014, as the CoStar report shows us that Central Pennsylvania office space has hit a plateau.
On the bright side, the office market is recovering, it just happens to be across the nation in cities like Houston, San Francisco, Denver, Seattle and San Jose. Nationally, 230,000 jobs have been created and that growth is concentrated in cities with booming tech and energy markets. While growth in other cities is not as good of news as growth in our own, this is a hopeful sign of what will soon come to Central Pennsylvania.
To better understand the clustered stagnation and growth in the office markets across the United States, let’s take a closer look at first our local market and then the national market for comparison.
Central Pennsylvania Office Market – More of the Same
The vacancy rate for the Central Pennsylvania office market increased ever so slightly from 8.5% to 8.6% from Q1 to Q2 and has been hovering in the 8% range over the last twelve months. Net absorption remains negative, but did drop down to -77,901 square feet from -135, 597 square feet last quarter. There were no new buildings delivered in Q2 and the quoted rental rate is up just $0.23, or 1.4%, to $16.69. We haven’t seen this rise above $17.00 since first quarter 2012. As the numbers show, there is not much activity to report, but merely more of the same with a few expected fluctuations in the market.
Pennsylvania’s current unemployment rate is 5.7% which is equal to 361,000 people. This rate peaked in 2010 at nearly 10% and has been slowly decreasing for the past four years. For Harrisburg-Carlisle MSA, the unemployment rate is currently 4.8% or 13,800 people. In this same area, the top three industries expected to have the largest growth between 2010 and 2020 are Home Health Aides, Amusement and Recreation Attendants and Security Guards. While job growth is a positive sign for the economy, none of these top growing industries will require much (if any) office space, so a correlating impact on the real estate market is not certain.
National Office Market – Growth & Increased Demand
Looking at the Midyear 2014 National Office Market Report from Co-Star, the second quarter ended with a vacancy rate of 11.4%, a decrease from the previous quarter. Net absorption was up from the previous quarter to positive 24,525,921 square feet compared to Q1’s net absoprtion of 18,005,574 square feet. In correlation with these trends, Q2 also ended with an increase in quoted rental rates which now stand at $22.22. Additionally, 217 buildings were delivered into the market totaling 11,383,932 square feet of new office space to accommodate the growing demand.
Most interestingly, the consumer confidence index rose to 85 in June, the highest level it’s been since January 2008. This has a strong correlation to consumer spending and impacts the GDP. What we can conclude from this national data is that the year got off to a slow start in first quarter 2014 due to the harsh winter conditions that lasted well into spring. But now, the market indicates health, growth and consumer confidence which is a welcome sign that other submarkets within the United States will also begin experiencing growth in the coming quarters.
The Takeaway
When considering all the data, we can expect the office sector leasing to become healthier, but 2014 will not be a break-out year. Rather it will take time and will likely mean several more quarters of stagnation or slow growth before we really start to see some changes. The growth will continue in the cities with heavy tech and energy markets, as these booming industries fuel jobs and demand more office space. But soon, the surrounding areas will also feel the ripple effects and begin to grow. It’s hard to accurately predict how long it will take until this growth reaches Central Pennsylvania. All it takes is a couple key businesses to accelerate the process. Until then, we should continue to keep an eye on these trends and look forward to a healthier, more active office market in the near future.
How have you been affected by the stagnant office market in Central Pennsylvania and beyond? Share your thoughts and experiences by commenting below!