The Surprising United States

Much to the surprise of many observers both in the US and overseas, the US economy continues to show slow but consistent growth. Whereas just this past summer many economists were forecasting that the US was headed back into another recession, gross domestic product instead increased at an annual rate of 2% in the third quarter, up significantly from the rate of 1.3% in the second quarter. The improving rate of growth occurred despite the crisis that is affecting the euro zone and the recession that is affecting Japan.

This rate of growth in the US is coming almost exclusively from the private sector and is offsetting the negative impact on the economy resulting from cutbacks at the state and local government levels. The Federal government, of course, continues to operate with an enormous deficit and this, combined with the expansive policies being followed by the Federal Reserve Board, provides considerable stimulus to the US economy.

Reflecting the stronger economy, the unemployment rate fell in 43 states in November, the most number of states to report such declines in eight years. The economy has now generated 100,000 or more jobs five months in a row — the first time that has happened since 2006, before the recent recession. And the number of Americans filing new claims for jobless benefits dropped to a 3-1/2-year low in mid-December, reaching the lowest level since May 2008. The continued improvement in the employment statistics is a strong indication that total growth in the 4th quarter will show an increase over the 2% rate of growth in the 3rd quarter.

The US commercial real estate market is also showing surprising strength. The real estate market benefits not only from the recovering economy, but also from the underlying health of the commercial market itself. This market was not overbuilt, as the residential market was, and there has been no deluge of foreclosed properties inundating the market, as many observers had predicted. As a result, with an improving economy, vacancy rates are declining in most sectors of the real estate market and rental rates are starting to move up.

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Office Market

The improvement in the office market is clearly picking up speed. Cushman & Wakefield reports that overall vacancy in 30 core CBD markets dropped 1.1 percentage points from a year ago to 13.8% at the end of September. Net absorption in those markets has been positive for four consecutive quarters, and was the highest third-quarter absorption level since 2006 and also the third-highest volume recorded in any quarter since the year 2000. Washington DC, Midtown Manhattan, San Francisco, Chicago and Orange County were the markets showing the best absorption levels. At the same time, year-to-date total leasing activity has jumped almost 23% over the same period last year, reaching close to 59 million square feet. The strong office leasing activity is beginning to have an effect on rental rates, with Class A rents being 1% higher than a year ago, although Class B and C rents continue to lag the recovery and are still slightly below the level of one year ago. However, some cities, such as San Francisco and New York, are already experiencing sharp increases in rental rates, with rents in some prime New York City buildings now exceeding $100 per square foot. The strength in the office leasing market is a clear indication that corporate management is optimistic as to the business outlook, and is another indication that 4th quarter GDP is likely to surprise on the upside.

As we have indicated in previous newsletters, pricing in the office market in cities such as New York, Boston and San Francisco seems to have risen in anticipation of rental increases that may not be realized for another year or two. But we continue to see good opportunities in other locations, including Houston, Chicago and Seattle, or in extended metropolitan areas such as Northern New Jersey and Orange County, California.

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