We are coming out of an office space market with a severe undersupply especially in the Class A market sector. Office vacancy rates before the recession were less than 2 per cent with almost no Class A space available. During 2008 and 2009 some new buildings were brought onto the market and during the same period most companies either contracted and or remained stable. Others were not able to get head office approvals to relocate to new premises.
As such, vacancy rates increased over the past two years to around 8 per cent; even though this is significantly higher than before, it is actually a normal rate for most international markets and far lower than most cities in the US. Significantly, Class A space is still in very low supply with most vacancy being found in a limited number of the older Class B buildings, especially those that have lost tenants to the new buildings.
The result is that over the past two years rental rates for Class A office space have remained relatively stable. The same or slight rent decreases have applied to the better Class B buildings with low vacancy rates. Landlords with higher than normal vacancy rates have offered their space at significantly lower rates, although typically only for the first year or two of the lease. These landlords are offering additional incentives to attract tenants, such as rent free periods or higher than normal fitout allowances, which is naturally preferable to leaving their space vacant.
Some of this vacant space had started to be taken up and encouragingly we are starting to see a trickle of new companies relocating to and setting up office in Cayman, which, although nowhere near pre recession levels, is a significant increase over the past 18 months. 2010 promises to be a year of gradual recovery in the office space market and vacancy rates will likely even fall slightly.
The GOAP accommodation will not likely be ready for occupancy until late in 2010 and possibly not until 2011. By that time, the office space market will have corrected itself slightly and vacancies will be lower than they are currently. Most of the tenants moving to the Government Building will be moving from Class B+ buildings and so vacancy will increase to a greater degree in this sector. Class A rent rates should remain relatively stable and could possibly even increase as new Class A buildings are pre-let, especially bearing in mind that any new Class A building that breaks ground in 2010 will unlikely be ready until the second half of 2011 at the earliest. Class B office landlords will likely continue to offer attractive incentives to tenants especially those in properties with higher than normal vacancy rates.
Assuming a relatively slow absorption of space over the next two years, vacancy rates are unlikely to increase to levels that much out of line the average for global office markets, even though they have been higher than those we’ve experienced in the recent past.
Jeremy S. Hurst
President & Broker/Owner
IRG – International Realty Group Ltd.
T: 525 9900
E: [email protected]