After a solid first quarter, the 6.4-million-square-foot Knoxville area multi-tenant office market has suffered additional setbacks in 2012. The second quarter’s 32,000 square feet of negative net absorption brought the vacancy rate to 15.2%, where it had started the year. Another 27,000 square feet of red ink followed in July and August. First Glance data put the third quarter vacancy rate at 15.9%. Occupancy is weaker for Class B/C space, with an 18.5% vacancy rate that is up 10 basis points year-over-year. Although the Class A rate is much lower at 11.8%, and down 170 basis points year-over-year, it was up 80 during the second quarter.
No new general purpose, multi-tenant space is under construction, and none has completed since 2009. As of the second quarter Reis had predicted vacancy would fall below 15.0% and stay there through the end of 2013, then increase as new construction revived. Weak demand might push near term vacancy higher but also discourage development.
Rent gains stalled. In the second quarter the average asking rent was unchanged at $15.83 psf, while the average effective rent slipped 0.1% to $12.42 psf. The asking average added a penny in the third quarter according to preliminary data, while the effective average was unchanged through August. Increases of 0.9% asking and 1.5% effective had been forecast for all of 2012, with improved gains to follow. This will require a strong fourth quarter turnaround. The second quarter asking averages for Class A and B/C space, meanwhile, were $18.02 psf and $13.73 psf.
“The Knoxville office market ended the second quarter of 2012 with an overall vacancy rate of 8.6%,” according to Cushman & Wakefield, up slightly for the period. “Rental rates ended the second quarter of 2012 at $15.37, an increase over the previous quarter.”