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Positive outlook for office property in US central business districts

The overall average vacancy rate for US CBDs fell to 13.9% at the midyear point of 2011, down 0.7% from 14.6% at the end of the first quarter of this year, and is at its lowest level since the middle of 2009, when vacancy measured 13.7%, the latest data from Cushman & Wakefield shows.

Vacancy rates declined in 71% of the markets tracked by Cushman & Wakefield, with the strongest drops in markets including Miami, Midtown South Manhattan and Washington, D.C.

The trigger for the significant decline in vacancy was a notable increase in new leasing activity in US CBDs, up 43.9% from midyear 2010 levels. With 41.8 million square feet in new office leases signed year to date, the first half of 2011 proved to be the strongest in terms of leasing activity since 1998, when 44.5 million square feet in leases were completed in the first half of the year. In the second quarter of 2011 alone, 23.6 million square feet in leases were signed, the highest three month total since the third quarter of 2006.

‘At this point in the year, there has been more new leasing activity than we had at midyear 2006 and 2007, two extremely strong years. If activity continues at this pace, 2011 will be on track for a historic year,’ said Maria Sicola, executive managing director and head of Americas Research for Cushman & Wakefield.

With no new construction completed in US CBDs in the second quarter, year to date construction completions remained at the first quarter total of 2.3 million square feet. An additional 2.1 million square feet of new office space is expected to be completed by year end, with projects underway in Washington, D.C., Houston, Miami and Portland.

Soaring levels of leasing activity and no new construction boded well for absorption, totaling 7.1 million square feet year to date, compared to negative 441,498 square feet at this time last year. With 6.4 million square feet absorbed in the second quarter, absorption was positive for the third consecutive quarter.

Average rental rates were $35.86 per square foot at midyear 2011, a $0.63 decline from this time last year.

‘Leasing activity and declining vacancies have given us a strong indicator in which direction the market is moving. While the national average for rental rates remained stagnant, more than half of the US markets we track did see an increase, and looking forward the remainder are expected to follow suit by year end,’ added Sicola.