Suburban office market turns in strong first quarter

The year is off to a good start in the suburban office market, where net absorption was the highest in five years, chipping away at what has been a chronically high vacancy rate.

In the downtown market, absorption was essentially flat, contributing to a slight increase in the vacancy rate.

The suburban multi-tenant office market saw net absorption of around 225,000 square feet. That’s the best number since the fourth quarter of 2006, when tenants soaked up 292,000 square feet, according to the Indianapolis office of CBRE. By CBRE’s count, the suburban vacancy rate fell a full point since the end of last year, from 21.2 percent to 20.2 percent.

Cassidy Turley’s first quarter report showed even stronger numbers: absorption for the quarter of 244,000 and vacancy falling from 21.4 percent at the end of last year to 19.9 percent. A year ago at this time, the numbers told a very different story. Vacancy was 22.5 percent, and instead of soaking up space ,overall occupancy fell by 37,000 square feet.

Several factors contributed to the good first quarter, brokers said.

“Tenants are becoming healthier financially and some are deciding to expand,” said David Moore, an office broker for Cassidy Turley.

He said that’s a switch from what had become all too common since 2008:  businesses failing and vacating their space. Moore said the numbers are also helped by the lack of any new construction in recent years.

Almost all of the suburban action is taking place on the north side in the Keystone submarket, where absorption was 104,000 square feet for the quarter, and in the North/Carmel submarket, where absorption was 89,000 square feet.

Among the largest recent deals was State Farm’s 90,000-square-foot lease at 9200 Keystone Crossing.   

If absorption remained at the same level over the next several quarters, champagne corks might be popping, but that won’t be the case, Moore said. “The market still has a ways to go.”

Landlords aren’t likely to regain the upper hand in rent negotiations any time soon, but some are in a better position than others. The owners of certain iconic properties, such as the Chase Tower downtown and certain Keystone at the Crossing office buildings, have a little more leverage with tenants, said Mary Beth Kohart, vice president of CBRE’s office services group.

Kohart said no single industry is leading the recovery in the suburban market. Insurance companies, tech firms and health care tenants are all playing a role, she said, noting that health care tenants are just as likely these days to rent space in the general office market than in the medical office market, which is tracked separately.
 
In the downtown submarket, vacancy ticked up to 17.7 percent in the first quarter compared with 17.6 percent at the end of last year, according to both CBRE and Cassidy Turley.

A handful of downtown tenants are shopping in the suburban market for space, said Moore, but he doesn’t see a trend of users moving away from downtown.