The office construction market remains deep in recession but positive signs are accumulating that the process of moving to recovery are well underway. The office vacancy rate held steady at 19.6% in the 2nd quarter, according to Property & Portfolio Research which also reported that office rental rates are now declining more slowly and that tenants rented 9.3 million square feet of additional space during the spring. This was the first net space absorption in a long time and reversed the 1st quarter decline.

Nine of fifty-four major markets moved to positive absorption in the second quarter: Atlanta, Chicago, Columbus, Kansas City, Memphis, Miami, New Orleans, New York and Orlando. However seven large office markets absorbed less space in the 2nd quarter: East Bay (Northern California), Long Island, Milwaukee, North Jersey, Palm Beach, San Francisco and St. Louis. This near balancing of gains and losses suggests that the market is near bottom.

Regionally, office market conditions vary considerably. The Washington/Baltimore region accounted for nearly 30% of net office space absorption in the spring quarter. Chicago accounted for nearly 15% and New York City over 10%. Vacancy rates in major markets range from 14-15% in Washington, New York, Norfolk and Salt Lake City to 24-27% in Detroit, Atlanta, Palm Beach, Riverside and Tampa.

Office construction spending has declined for twenty-one months to 60% of the September 2008 peak level but the initially rapid pace of decline has slowed to only 1.5% in May. About a 6% further drop is expected by yearend before recovery begins. The value of office starts is down only 5% year to date through June compared to the same months last year. However, starts have improved strongly in the last few months with June starts about double the bottom of the cycle a year earlier. The pipeline is starting to refill. The Reed Construction Data starts forecast expects steady office starts this summer and then small but progressively rising gains beginning this fall.

Office developers face lots a headwinds, notably difficult credit access, cautious prospective tenants and significant vacant space in many markets. But now they see the light at the end of the tunnel. Design work on commercial buildings has stopped declining nationally which means it is rising in some market niches. Office employment has been rising since the beginning of the year. Together, Professional and Business Services and Finance and Insurance employers have added 175,000 jobs since January.

Both contractors and real estate investors will see the state of the office market as recessionary through 2011 but the deterioration of the market has ended and long recovery process is set to begin soon.