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Office Space Demand Bodes Well for Non-Traded REITs

According to a report by Cassidy Turley, demand for office space has risen sharply in the second quarter of 2014. The commercial real estate services provider also reports that new office building development is gaining momentum.

This is good news for some non-traded REITs, such as KBS REIT III and Cole Office and Industrial REIT, which focus almost exclusively on office space.

The second quarter witnessed improvements in a number of areas including average asking rents rising by 2.2%, office markets absorbing 41% more square feet than quarter one, and vacancy rates falling 10 basis points (bps).

The future also looks bright for office space as Cassidy Turley reports that there was 73 million square feet of new office space under construction at the close of the second quarter, which represents an increase of 34% from a year ago.

According to the company’s chief economist, Kevin Thorpe, “Although development is picking up, the office sector does not currently face the cyclical headwind of overbuilding, and absorption rates are solid enough in most markets. The majority of the country should expect that office rents will grow at an accelerating rate in the second half of the year driven by improving economic data, improving confidence and steady job creation. This will not be true for all markets, but it will be true for most.”

Certain regions of the United States saw dramatic increases in office space activity.

In particular, the Midwest absorbed 2.3 million square feet in the second quarter, an increase of 490% from quarter one. Such statistics provide a lens to view the status of certain REITs, such as RREEF Property Trust, which has a focus on office space and a strong presence in Illinois. In addition, New York comes in number one in terms of demand for office space while San Francisco was strongest in terms of rent growth.

The coast to coast expansion and development of the office sector make it one to watch for the rest of the year.

Cassidy Turley will make its full first quarter office and industrial market reports available on its website July 18.